2013 (7) TMI 806 - HC - Income Tax

Allowability on interest on borrowed funds - Whether the Tribunal was right in confirming the order passed by the CIT (Appeals) deleting the disallowance made by the AO on the ground that the assessee had given interest free loans to associate concerns out of interest bearing funds - Held that - Once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case - No businessman can be compelled to maximize its profit court relied upon the judgement of CIT v. Dalmia Cement (B.) Ltd 2001 (9) TMI 48 - DELHI High Court) - the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest-free loan - the test in such a case is really whether this was done as a measure of commercial expediency appeal decided against revenue.

Issues:
1. Disallowance of interest expenses on interest-free loans given to associate concerns.
2. Challenge to the order of the Commissioner of Income-tax (Appeals) deleting the disallowance.
3. Interpretation of commercial expediency in relation to interest on borrowed funds.

Detailed Analysis:
1. The primary issue in this case was the disallowance of interest expenses incurred by a company on interest-free loans given to associate concerns. The Assessing Officer disallowed a portion of the interest expenses on the grounds that the loans were not incurred for business purposes. However, the Commissioner of Income-tax (Appeals) set aside this order and deleted the disallowance, emphasizing that the loans were given from funds available in earlier years and that there was no interest liability incurred on those funds. The Tribunal further noted that the interest-free funds available with the company exceeded the loans advanced to the sister concerns, indicating that the borrowed money was not utilized for the loans. The Tribunal relied on the principle that interest is not disallowable if the total interest-free advances do not exceed the total interest-free funds available with the assessee.

2. The challenge to the order of the Commissioner of Income-tax (Appeals) was brought before the Income-tax Appellate Tribunal, which upheld the decision to delete the disallowance. The Tribunal found no evidence contrary to the Commissioner's findings and noted the substantial interest-free funds available with the company. The Tribunal concluded that the disallowance made by the Assessing Officer solely on the ground of advances given out of borrowed funds was not sustainable. The Tribunal correctly approached the issue and ruled in favor of the assessee, highlighting the lack of evidence to support a different conclusion.

3. The interpretation of commercial expediency in relation to interest on borrowed funds was crucial in this case. Citing the judgment in S. A. Builders Ltd. v. CIT, the apex court emphasized that the test for allowability of interest on borrowed funds is whether the transaction was done as a measure of commercial expediency. The court clarified that expenditure incurred for business purposes, even if not under a legal obligation, is allowable if it was incurred on grounds of commercial expediency. The court stressed that the Revenue cannot dictate how much expenditure is reasonable, as long as there is a nexus between the expenditure and the purpose of the business. The Commissioner of Income-tax (Appeals) and the Tribunal correctly applied this principle in favor of the assessee, considering the material on record and substantial interest-free funds available.

In conclusion, the judgment upheld the decision to delete the disallowance of interest expenses on interest-free loans, emphasizing the importance of commercial expediency in such transactions. The courts ruled in favor of the assessee based on the lack of evidence to support the Revenue's contentions and the adherence to well-established principles regarding business expenditure.

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