2019 (1) TMI 1088 - HC - Income Tax

Disallowance of interest expenditure on interest bearing loans, on account of diversion and advances and interest free loans to sister companies - Held that - As alleged that the respondent-assessee had not furnished copies of alleged agreements with M/s Gaursons India Limited and M/s U.P. Township Private Limited. The Tribunal in the impugned order has referred to different amounts paid with reference to other advances and observed that all the above advances even if it is presumed that they are not given by the assessee for the non-business purposes they do not exceed the funds available with the assessee without interest. Keeping in view the assertions made by the Revenue on the findings recorded by the Tribunal, we feel that the appeal should not be dismissed in limine at the admission stage itself but should be heard in detail. Therefore, without expressing any opinion, we are issuing notice in this appeal returnable on 14th March,2019.

Issues:
1. Disallowance of interest expenditure on loans for diversion and advances.
2. Allowability of interest as a deduction under Sections 36(1)(iii) and 37 of the Income Tax Act.
3. Examination of commercial expediency in giving interest-free loans to sister companies.
4. Distinction between loans and advances for business purposes versus personal interest.

Issue 1: Disallowance of interest expenditure on loans for diversion and advances:
The High Court addressed the appeal by the Revenue concerning the disallowance of interest expenditure of &8377; 5,68,97,378/- on interest-bearing loans due to diversion and advances to sister companies. The Tribunal had previously allowed the appeal of the respondent-assessee and deleted the disallowance. The respondent-assessee had taken loans from banks and provided interest-free loans and advances to sister companies, raising concerns about the purpose and commercial expediency of these transactions.

Issue 2: Allowability of interest as a deduction under Sections 36(1)(iii) and 37 of the Income Tax Act:
The High Court referred to the Supreme Court's decision in S.A. Builders versus Commissioner of Income Tax, emphasizing the need for interest expenditure to be incurred for commercial expediency to be allowed as a deduction. The Court highlighted the distinction between loans and advances for business purposes versus personal interest, citing relevant judgments from the Delhi High Court to support this distinction.

Issue 3: Examination of commercial expediency in giving interest-free loans to sister companies:
The Court analyzed the submissions made by the appellant-Revenue and the respondent-assessee regarding the purpose of providing interest-free loans and advances to sister companies. The respondent-assessee argued that these transactions were part of their business plan to manage fund flows within the group and were not connected to project loans. The Tribunal considered the availability of funds without interest and found that the advances did not exceed the funds available to the assessee without interest.

Issue 4: Distinction between loans and advances for business purposes versus personal interest:
The High Court reiterated the importance of assessing the commercial expediency of transactions involving loans and advances for business purposes. It emphasized the need for interest expenditure to be incurred voluntarily and for commercial reasons to facilitate business operations indirectly. The Court decided to issue notice for a detailed hearing on the appeal, withholding any opinion on the matter pending further examination.

Overall, the judgment delves into the intricacies of interest expenditure deductions under the Income Tax Act, emphasizing the significance of commercial expediency and distinguishing between transactions for business purposes versus personal interest. The Court's decision to further examine the appeal reflects a commitment to thoroughly evaluate the issues raised before reaching a final conclusion.

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