2018 (10) TMI 439 - HC - Income Tax

Interest free advances - Disallowance of part interest paid on unsecured loans - assessee had advanced loans to third parties on which no interest was charged and received - advancement of loan on business expediency - Held that - Tribunal was of the correct view that the respondent-assessee had paid interest on capital borrowed for business purpose and in the absence of any allegation and finding that the respondent-assessee had diverted unsecured loans for non-business purpose no disallowance could be made. As per Section 36(1)(iii) of the Act interest paid for capital borrowed for purpose of business has to be allowed as a deduction. Purpose of business need not be the business of the assessee, for deduction under Section 36(1)(iii) of the Act to be allowed. Further, Revenue cannot assume the role and occupy armchair of a businessman to decide whether expenditure was reasonable. The Revenue cannot look at the matter from its own standpoint, but opinion and decision of a businessman on business expediency matters. Money borrowed even when advanced to a subsidiary for some business purpose would qualify for deduction of interest. In the context of the present case the unsecured loans were not used for personal purpose. Merely because non-interest-bearing advances were given to third parties, would not justify a finding that the test of commercial expediency was not satisfied. Interest free advances were preferred to the parties connected with the business of the respondent/assessee. Money taken on loan was not diverted for non business purpose - decided in favour of assessee

Summary

Issues:
Disallowance of part interest paid on unsecured loans.

Analysis:
The High Court judgment pertains to an appeal by the Revenue under Section 260A of the Income Tax Act, 1961, concerning the disallowance of part interest paid on unsecured loans. The main issue revolves around the disallowance of interest paid on unsecured loans of ?502.69 crores, as the respondent-assessee had advanced ?172.59 crores to third parties without charging interest. The Assessing Officer proportionately disallowed an amount of ?23.60 crores from the total interest paid by the respondent-assessee. The Dispute Resolution Panel affirmed the addition, emphasizing the need to examine if the expenses meet the criteria of "business connection" and "expediency." However, the Tribunal overturned this decision and deleted the addition of ?23.60 crores.

The Tribunal's decision was based on factual findings, noting that the respondent-assessee had paid interest on capital borrowed for business purposes. As per Section 36(1)(iii) of the Act, interest paid on capital borrowed for business is deductible. The Tribunal highlighted that since the respondent-assessee paid interest on unsecured loans taken for business purposes and did not earn interest on the advances given, the disallowance of interest was unwarranted. The Tribunal's decision was in line with the law, as interpreted in the case of S.A. Builders Ltd. v. CIT, where it was established that interest paid for the purpose of business or profession is deductible if it meets the test of commercial expediency.

The judgment further elaborated on the broad scope of the term "commercial expediency" and emphasized that the purpose of business need not be the business of the assessee for deduction under Section 36(1)(iii) to be allowed. The court clarified that money borrowed, even if advanced to a subsidiary for business purposes, qualifies for interest deduction. In the present case, the unsecured loans were not utilized for personal benefit, and providing non-interest-bearing advances to third parties did not negate the commercial expediency test. Ultimately, the court dismissed the Revenue's appeal, concluding that the findings of the Tribunal were in accordance with the law, and no substantial question of law arose from the case.