2009 (2) TMI 897 - HC - Income Tax

Summary

Issues involved: Disallowance of interest on interest-free advances diverted to group concerns.

Summary:

The Appeals before the Bombay High Court concerned the disallowance of interest on loans advanced to sister companies. The Assessing Officer disallowed interest for the current assessment year, despite not doing so in previous years. The CIT (A) upheld the disallowance, leading to the Appeals before the Tribunal. The Tribunal, after considering the source of funds and commercial benefits derived by the assessee, held that no disallowance was warranted. The Revenue appealed this decision.

Regarding the first advance to a subsidiary company, it was found that the interest could not have been disallowed as the loan was for commercial expediency, utilized for repayment of Inter Corporate Deposits (ICD). Similarly, for the loan to another company, it was established that the loan was also for commercial expediency, and the interest could not be disallowed based on the source of funds.

The High Court noted that the loans were given from the company's surplus and emphasized the concept of commercial expediency in advancing loans to sister companies. Citing the case of S.A. Builders Ltd. vs. Commissioner of Income Tax, the Court highlighted that loans for commercial expediency are permissible. The Court concluded that since the loans were not used to give loans to sister companies and were for commercial expediency, there was no merit in the Appeals, which were subsequently dismissed.