2019 (4) TMI 1793 - HC - Income Tax

Deduction of interest on borrowed fund when the same is utilised to give interest free loan/share application money to subsidiary companies - HELD THAT - Assessee is a private limited company and is engaged in the business of financing. During the scrutiny assessment of the assessee's return for the assessment year 2008-09, Assessing Officer noticed that the assessee had claimed expenditure of interest paid on borrowed funds. The assessee had also funded its sister concern without charging interest. The Assessing Officer therefore disallowed the interest expenditure. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment held in favour of the assessee. The entire issue is squarely covered in favour of the assessee in case of S.A.Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT . The Tribunal correctly held that the assessee's decision to fund its subsidiaries driven by business exigency.

Summary

Issues:
1. Whether the ITAT erred in not upholding the decision of the Ld.CIT (A) in allowing assessee's claim for deduction of interest on borrowed fund when the same is utilized to give interest-free loan/share application money to subsidiary companies?

Analysis:
The case involved an appeal by the Revenue against the judgment of the Income Tax Appellate Tribunal (ITAT) regarding the deduction of interest on borrowed funds by the assessee for providing interest-free loans to its subsidiary companies. The assessee, a private limited company engaged in financing, had claimed interest paid on borrowed funds as an expenditure during scrutiny assessment for the assessment year 2008-09. The Assessing Officer disallowed the interest expenditure as the assessee had funded its sister concern without charging interest. The Tribunal, relying on the decision of the Supreme Court in S.A. Builders Ltd. Vs. CIT, held in favor of the assessee. The Tribunal emphasized the commercial expediency of advancing loans to the sister concern and stated that the decision regarding business interest lies with the assessee, not the Assessing Officer. The Tribunal concluded that the expenditure was connected to the business purpose, supporting the assessee's position.

The High Court found no error in the Tribunal's view and noted that the issue was already settled in the case of S.A. Builders Ltd. The Court agreed with the Tribunal's decision that the assessee's funding of subsidiaries was driven by business exigency. The Court emphasized that the Revenue cannot dictate the business decisions of an assessee and that the connection between expenditure and business purpose, even if not directly related to the assessee's business, justifies the deduction claimed. Consequently, the Court dismissed the Income Tax appeal, stating that no question of law arose from the Tribunal's decision.

In conclusion, the High Court upheld the Tribunal's decision in favor of the assessee, emphasizing the principle of commercial expediency in business decisions and the autonomy of the assessee in determining its expenditure related to business purposes. The judgment reaffirmed the position that the Revenue cannot interfere with the business judgment of an assessee as long as there is a valid nexus between the expenditure and the business purpose, supporting the deduction claimed by the assessee.