2015 (11) TMI 342 - HC - Income Tax

Disallowance of interest paid to the bank - the appellant/assesse had advanced an interest free loan to its sister concern although the appellant had no business dealings with the sister concern - Whether while arising at the chargeable income u/s 29 considering the provisions of Section 36(1)(iii), the disallowance of interest paid to banks is mandatory on the true and correct interpretation of the words for the purpose of business? - Held that - The Assessing Officer s view that the advance was not for business purposes as the appellant had no business dealings with the sister company is erroneous. Commercial expediency in advancing loans does not arise only on account of there being transactions directly between the holding company and the subsidiary company or between the group companies inter se. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one group company to advance amounts to another group company, if, for instance, as a result thereof the former benefits. In the present case, as we have already demonstrated, there would be a direct benefit on account of the advance made by the appellant to its sister company if the same improves the financial health of the sister company and makes it a viable enterprise. We hasten to add that it is not necessary that the advance results in a positive tangible benefit. So long as the amount is advanced with that view in mind or with any other commercially expedient view in mind that is sufficient. Thus the question of law is answered in favour of the appellant and against the department. The order of the Tribunal is set aside. The appellant shall be entitled to the deduction under Section 36(1)(iii). - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest paid to banks under Section 36(1)(iii) of the Income Tax Act.
2. Commercial expediency of interest-free loans to sister concerns.
3. Interpretation of the Supreme Court judgment in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals).

Detailed Analysis:

1. Disallowance of Interest Paid to Banks under Section 36(1)(iii):
The appellant challenged the order of the Income Tax Appellate Tribunal that upheld the Assessing Officer's decision to disallow Rs. 1,31,24,332/- as interest paid to banks. The Assessing Officer's rationale was that the appellant had advanced an interest-free loan to its sister concern, M/s Kolkatta Hotels Private Limited, without any business dealings, thus failing to meet the "for the purpose of business" requirement under Section 36(1)(iii) of the Income Tax Act. The CIT (Appeals) had previously deleted this addition, finding that the advance was made for commercial expediency and business purposes.

2. Commercial Expediency of Interest-Free Loans to Sister Concerns:
The CIT (Appeals) found that the appellant and its sister concern were both in the hotel business and that the funds advanced were used for the sister concern's business purposes. The CIT (Appeals) relied on the Supreme Court judgment in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals), which states that the test for allowing interest as a deduction is whether the advance was made as a measure of commercial expediency. The CIT (Appeals) concluded that the advance was justified and covered by the appellant's capital and interest-free reserves.

3. Interpretation of the Supreme Court Judgment in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals):
The Tribunal reversed the CIT (Appeals) decision, arguing that the appellant had not demonstrated commercial expediency. However, the High Court found this view unsustainable. The High Court emphasized that commercial expediency includes any expenditure a prudent businessman incurs for business purposes, even if not under legal obligation. The High Court noted that the appellant held 88.75% of the sister concern's equity and that the funds were used to discharge liabilities, thus benefiting the appellant directly.

Conclusion:
The High Court concluded that the CIT (Appeals) was correct in its findings and that the Tribunal erred in its judgment. The High Court held that the appellant's advance to its sister concern was commercially expedient and that the interest paid to banks should be allowed as a deduction under Section 36(1)(iii). The High Court set aside the Tribunal's order, ruling in favor of the appellant.