2010 (6) TMI 879 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest u/s 36(1)(iii) on interest-free loan to sister concern.
2. Commercial expediency of the interest-free loan.
3. Nexus between borrowed funds and business purpose.

Summary:

Disallowance of Interest u/s 36(1)(iii):
The assessee appealed against the CIT(A)'s order confirming the disallowance of Rs. 14,82,695/- u/s 36(1)(iii) of the I.T. Act. The Assessing Officer (AO) noted that the assessee had advanced Rs. 1,23,65,787/- interest-free to its sister concern, M/s Luxmi Engg. Works, out of borrowed funds. The AO disallowed the interest, citing the Hon'ble Punjab & Haryana High Court's decision in CIT Vs. Abhishek Industries [286 ITR 1 (P&H)], as the loan was not for business purposes.

Commercial Expediency:
The assessee argued that the interest-free loan was advanced to prevent M/s Luxmi Engg. Works from being declared a Non-Performing Asset (NPA) by the bank, which would affect the assessee's reputation and goodwill. The assessee relied on the Supreme Court's decision in S.A. Builders Ltd Vs. CIT [288 ITR 1 (SC)], which allows interest deduction if the loan is for commercial expediency. However, the AO and CIT(A) rejected this plea, stating that the loan was not for the assessee's business purposes.

Nexus Between Borrowed Funds and Business Purpose:
The Tribunal examined whether the interest-free loan was for the assessee's business purposes. It was found that both the assessee and its sister concern were independent entities with different products, and the loan was not for the assessee's business. The Tribunal upheld the disallowance, stating that the assessee failed to establish commercial expediency and the nexus between the borrowed funds and business purpose, as required by the Supreme Court in S.A. Builders Ltd (Supra).

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming the disallowance of Rs. 14,82,695/- u/s 36(1)(iii) of the Act. The appeal of the assessee was dismissed.