2017 (8) TMI 185 - HC - Income Tax

Disallowing interest under Section 36(1)(iii) - Held that - A perusal of the order passed by the Tribunal shows that relying upon the judgment of this Court in Bright Enterprises Private Limited Vs. Commissioner of Income Tax (2015 (11) TMI 342 - PUNJAB & HARYANA HIGH COURT) it was recorded that commercial expediency in advancing loans does not arise only on account of there being transactions directly between the holding company and the subsidiary company or between the group companies inter se. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one group company to advance amounts to another group company. In the present case, the impugned advance had been made out of interest free funds available with the assessee and, therefore, there was no question of disallowing interest under Section 36(1)(iii) of the Act. After considering the entire evidence on record and the case law on the point, it was concluded by the Tribunal that disallowance of interest under Section 36(1)(iii) of the Act pertaining to the sister concerns was not justified. - Decided in favour of assessee.

Issues:
1. Disallowance of interest expenditure on investments in sister concerns.
2. Interpretation of Section 36(1)(iii) of the Income Tax Act.
3. Commercial expediency in advancing loans to sister concerns.
4. Applicability of previous judgments in similar cases.

Issue 1: Disallowance of interest expenditure on investments in sister concerns
The appellant-revenue filed an appeal against the Tribunal's order deleting the addition of ?3,71,68,025 made by the Assessing Officer on account of disallowance of interest expenditure. The Assessing Officer had concluded that the investments in sister concerns were colorable transactions of interest-free loans/advances without any business purpose. The CIT(A) confirmed the disallowance, stating that the investments did not serve any business purpose. However, the Tribunal allowed the appeal, holding that the investments were made from interest-free funds and there was no justification for disallowing interest under Section 36(1)(iii) of the Act.

Issue 2: Interpretation of Section 36(1)(iii) of the Income Tax Act
The Tribunal relied on the judgment in Bright Enterprises Private Limited v. CIT to determine that commercial expediency in advancing loans does not depend on direct transactions between companies or their business lines. The Tribunal found that the advance in question was made from interest-free funds, thus not warranting disallowance of interest under Section 36(1)(iii) of the Act. The Tribunal cited relevant case law and concluded that disallowance of interest pertaining to sister concerns was not justified.

Issue 3: Commercial expediency in advancing loans to sister concerns
The Tribunal emphasized that commercial expediency in advancing loans does not solely rely on direct business dealings between companies. It noted that the advance made from interest-free funds was justified and beneficial for the financial health of the sister company, making it a viable enterprise. The Tribunal highlighted that the advance did not need to result in a tangible benefit as long as it was made with a commercially expedient view in mind.

Issue 4: Applicability of previous judgments in similar cases
The Tribunal referred to judgments in cases like Abhishek Industries and Bright Enterprises Private Limited, which were overruled by higher courts in favor of the assessee. The Tribunal also cited other judgments supporting the case of the assessee and concluded that since the decisions in the aforementioned cases were overruled, the disallowance of interest under Section 36(1)(iii) was not justified. Consequently, the appeal of the assessee was allowed.

In conclusion, the High Court dismissed the appeal by the appellant-revenue as it found no substantial question of law arising from the Tribunal's findings, which were deemed legal and not based on misreading of evidence.

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