2015 (3) TMI 844 - HC - Income Tax

Interest free loans advance to sister concern - whether were for business purpose or commercial expediency was not proved by the assessee - Held that - In the present facts, we find that the CIT(A) has in the impugned order rendered a finding of fact that there was trade transaction between the Respondent Assessee and its group concern - M/s. Suraj Diamonds Consultancy Pvt. Ltd. during the subject Assessment Year i.e. A. Y. 2007-08. Once the fact of business relationship between the Respondent Assessee and the group concern is established and accepted, then the amount advanced by the Respondent Assessee to its group concern would result in allowing of interest expenditure incurred by the Respondent-Assessee on the amount of loan borrowed by him As decided in S.A. Builders case 2006 (12) TMI 82 - SUPREME COURT 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 assesee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role of decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit.we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits - Decided in favour of assessee.

Summary

Issues:
- Interpretation of interest-free loans advanced by the assessee to its sister concern for business purposes without proving commercial expediency.

Analysis:
The judgment concerns an appeal under Section 260A of the Income Tax Act, 1961 challenging the order passed by the Income Tax Appellate Tribunal for the Assessment Year 2007-08. The primary issue revolves around whether the interest-free loans advanced by the assessee to its sister concern were for business purposes without proving commercial expediency. The Respondent claimed an expenditure of &8377; 51.91 lakhs on interest paid on a loan borrowed from American Express Bank, which was immediately advanced to its group concern. The Assessing Officer disallowed the interest paid, stating that the group concern was not a trade creditor. The Commissioner of Income Tax (Appeals) upheld the disallowance, emphasizing the timing difference between the loan advance and the trade transaction. However, the Tribunal found that the amounts were advanced for purchasing stones and relied on a similar case where interest expenditure disallowance was deleted, leading to allowing the appeal of the Respondent-Assessee.

Further, the Appellant-Revenue contended that the Tribunal's reliance on a previous case was inappropriate as specific facts regarding the loan, advance date, and utilization were not provided. Reference was made to a Supreme Court decision emphasizing that each case of interest on borrowed loans must be decided based on individual facts. The Appellant argued that the Tribunal did not establish a business relationship, making the Supreme Court's decision inapplicable. However, the High Court found that a trade transaction between the parties was established during the Assessment Year 2007-08, justifying the interest expenditure. Citing the Apex Court's view on commercial expediency, the High Court concluded that the Tribunal's decision was reasonable and no substantial question of law arose for consideration.

In conclusion, the High Court dismissed the appeal, emphasizing the importance of commercial expediency in determining the allowability of interest expenditure on loans advanced to a sister concern for business purposes. The judgment underscores the need to establish a business relationship and commercial rationale for such transactions to be considered legitimate for tax purposes.