2017 (5) TMI 638 - HC - Income Tax

Disallowance of interest expenditure - whether the investments in sister concerns served any business purpose? - Held that - The investment in sister concerns in the shape of share application money was to the tune of ₹ 20,32,60,000/-. The assessee was having current liabilities and profits to the tune of ₹ 17,41,39,750/-. The total non interests bearing funds available with the assessee were at ₹ 49,43,04,638/-. Out of the total funds on which no interest was paid by the assessee amounting to ₹ 49,43,04,638/-, the assessee had advanced ₹ 20,32,60,000/-. Thus, there was sufficient non-interest borrowing funds out of which the assessee had advanced/invested in sister concerns. It was further recorded that in the assessment year 2012-13 also, the assessee had sufficient interest free funds to make investment in the group companies relying upon the decision of the Apex Court in Hero Cycle Private Limited Vs. Commissioner of Income Tax (Central) 2015 (11) TMI 1314 - SUPREME COURT OF INDIA and Commissioner of Income Tax-I, Ludhiana Vs. M/s Abhishek Industries Limited, Ludhiana (2006 (8) TMI 123 - PUNJAB AND HARYANA High Court ). - Decided in favour of assessee.

Summary

Issues:
- Disallowance of interest expenditure
- Justification for advancing interest-free funds to sister concerns

Disallowance of Interest Expenditure:
The appellant, engaged in publication business, had investments in related concerns without receiving any interest. The Assessing Officer disallowed interest expenditure of ?54,10,225, as the appellant failed to show how interest-free advances served business interests. The CIT(A) upheld the disallowance, stating investments did not serve any business purpose. The Tribunal, however, allowed the appeal, noting the appellant had sufficient non-interest borrowing funds to invest in sister concerns. Referring to legal precedents, the Tribunal held that the investments were for commercial expediency and business purposes, entitling the appellant to deduction under the Income Tax Act. The High Court found no illegality in the Tribunal's findings, dismissing the appeals.

Justification for Advancing Interest-Free Funds to Sister Concerns:
The Assessing Officer observed that the appellant, after making interest-free advances, applied for interest-linked loans, questioning the necessity for interest-bearing loans with surplus funds. The CIT(A) confirmed the disallowance, emphasizing the lack of justification for advancing interest-free funds. However, the Tribunal found the appellant had adequate non-interest borrowing funds for investments in sister concerns, citing legal precedents to support the commercial expediency of the transactions. The High Court upheld the Tribunal's decision, stating no substantial question of law warranted interference.

In conclusion, the High Court dismissed the appeals, affirming the Tribunal's decision to delete the disallowance of interest expenditure, as the investments in sister concerns were deemed justified for commercial expediency and business purposes, entitling the appellant to deduction under the Income Tax Act.