2015 (2) TMI 716 - HC - Income Tax

Disallowance of interest - loan given to subsidiary company - Held that - In the instant case, as find that the assessee had deep business interest in the existence of its subsidiary company and discharge its legal obligation by repaying the instalments of loan to the financial institutions. Such loans were given for the purpose of business. It is not even the Department's case that the amount given by the assessee was not for business purposes or that the capital borrowed was not utilised for the purpose of business. The assessee was entitled to deduction of interest amounting to ₹ 9,54,000 on the loan given to its subsidiary company. The Tribunal was not justified in disallowing the interest. - Decided in favour of assessee. Disallowance of expenses claimed towards guarantee commission - Held that - The expenditure incurred by the assessee in obtaining an asset on deferred payment basis is a revenue expenditure and that the Tribunal committed an error in holding such expenditure to be a capital expenditure.- Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961.
2. Disallowance of guarantee commission as a revenue expenditure.
3. Reversal of decision on bank guarantee commission admissibility.

Analysis:

Issue 1: Disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961:
The case involved the deduction of interest under section 36(1)(iii) of the Act, which allows for the deduction of interest paid in respect of capital borrowed for business purposes. The Tribunal disallowed the interest amounting to Rs. 9,54,000 as attributable to the debit balances in the account of a subsidiary company. However, the High Court held that the assessee was entitled to the deduction as the borrowed capital was utilized for business purposes, and the assessee had a deep business interest in the subsidiary company. The Court referred to precedents emphasizing that the expression "for the purpose of business" is wider in scope than "for the purpose of earning income profits of gains." Therefore, the Tribunal's disallowance of interest was deemed unjustified.

Issue 2: Disallowance of guarantee commission as a revenue expenditure:
The Tribunal had held that the guarantee commission paid by the assessee for importing generating sets was a capital expenditure and not allowable as a deduction. However, the High Court disagreed, citing a Supreme Court decision where it was established that guarantee commission paid for acquiring assets on deferred payment basis qualifies as a revenue expenditure. The Court found that the expenditure incurred by the assessee in obtaining assets on deferred payment basis should be treated as a revenue expenditure, not a capital expenditure as determined by the Tribunal.

Issue 3: Reversal of decision on bank guarantee commission admissibility:
The High Court addressed the reversal of the decision on the admissibility of bank guarantee commission amounting to Rs. 5,49,822. The Court found that the expenditure incurred by the assessee in obtaining assets on deferred payment basis is a revenue expenditure, in line with previous legal precedents. Therefore, the Tribunal's decision to disallow the bank guarantee commission was overturned, and the questions of law were answered in favor of the assessee.

In conclusion, the High Court allowed the appeal, quashed the Tribunal's order, and ruled in favor of the assessee on all three substantial questions of law raised in the case.