2016 (1) TMI 657 - AT - Income Tax

Disallowance of interest - amounts diverted to subsidiary company - Held that - As the entire money in a business entity comes in a common kitty Monies are received as share capital or as term loan or working capital loan or as internal accruals do not have different colour. Whatever the receipts in the business, have the colours of business receipts and have no separate identification. The only thing sufficient is to disallow the interest paid on the borrowing to the extent of amount lend to subsidiary company without carrying any interest would be that the assessee has some loans or interest bearing debts to be repaid. In case, the assessee had a surplus which according to it could not be immediately, it would either be required to be circulated and utilized for the purpose of business or to be invested in a manner in which it generates income and not diverted towards subsidiary free of interest. Otherwise it amounts to not presenting the true and correct income of the assessee and the subsidiary company would be enjoying the benefit at the cost of assessee. In our opinion, interest incurred by the assessee to the extent amounts are diverted to subsidiary company on interest free basis on whatever reason may be are to be disallowed. If there is any chance of recoverability, then there is a provision in the Act to claim the same as bad debt. Various case law relied by the assessee s counsel is of no relevance to the facts of the present case. In view of this, we are of the opinion that CIT(A) not justified in deleting the disallowance proportionate interest on the loan advanced to the sister concern. - Decided in favour of revenue

Summary

Issues:
- Disallowance of interest of Rs. 23,04,880
- Commercial expediency in advancing interest-free loan to subsidiary
- Applicability of Supreme Court decisions
- Consistency in ITAT judgments regarding interest disallowance
- Nexus between funds advanced to sister concern and interest incurred on borrowings

Analysis:
1. Disallowance of interest: The appeal by the Revenue concerns the deletion of disallowance of interest amounting to Rs. 23,04,880 by the Commissioner of Income-tax (Appeals) IV, Hyderabad. The Assessing Officer disallowed this interest claimed by the assessee during the year due to an interest-free loan of Rs. 255 lakhs given to its subsidiary, Survayavanshi Textiles Ltd. The Revenue contended that there was no commercial expediency for the assessee in providing loans to the sister concern, leading to the disallowance.

2. Commercial expediency: The Assessing Officer argued that the advance to the sister concern lacked commercial expediency, citing the financial statements showing sales and purchases between the entities. The Revenue emphasized that advancing money without receiving interest while paying interest on borrowed funds does not constitute commercial expediency. The Tribunal noted that the subsidiary was not a subsidiary of the assessee during the relevant assessment year, thus questioning the deduction claimed by the assessee.

3. Supreme Court decisions: The assessee relied on Supreme Court decisions in SA Builders Ltd. and Munjal Sales Corp. to support its position. The Tribunal examined the applicability of these decisions, emphasizing that interest on borrowed funds advanced to subsidiary concerns may not always be allowed, depending on the specific facts and circumstances of each case.

4. Consistency in ITAT judgments: The Tribunal discussed the consistency in ITAT judgments regarding interest disallowance under similar conditions in previous assessment years. It highlighted a previous decision where the ITAT upheld the disallowance of interest, leading to the restoration of the disallowance made by the Assessing Officer in the present case.

5. Nexus between funds advanced and interest incurred: The Tribunal considered the nexus between the funds advanced to the sister concern and the interest incurred on borrowings. It emphasized the need for a clear connection between the amount advanced and the interest paid, stating that notional interest cannot be disallowed without a definitive link between the funds and the business purposes. The Tribunal ultimately set aside the order of the CIT(A) and restored the disallowance made by the Assessing Officer.

In conclusion, the Tribunal allowed the Revenue's appeal, emphasizing the importance of establishing commercial expediency and a direct nexus between funds advanced to related entities and interest incurred on borrowings to determine the deductibility of interest expenses. The judgment underscored the need for consistency in interpreting tax laws and applying legal precedents to ensure fair and equitable tax assessments.