2019 (3) TMI 362 - HC - Income Tax

Disallowance of interest on borrowed funds - commercial expediency - funds diverted for advancing interest-free loans to sister concerns - Tribunal held the pattern of loan extended to sister concerns would qualify business expediency as relying on S.A.Builders Ltv. v. CIT 2006 (12) TMI 82 - SUPREME COURT - HELD THAT - In the impugned order passed by the Tribunal, we find that the Tribunal took note of the factual position and held that loans advanced by the assessee was a business expediency. Tribunal has recorded the facts to support its stand that the decision in S.A.Builders would aid the case of the assessee. The CIT(A) was also satisfied with the nature of the transaction and it would qualify as business expediency . Merely because a reference is pending that does not mean that the decision rendered by the Hon ble Supreme Court is no longer good law. As pointed out by us earlier, the CIT(A) and the Tribunal has discussed the factual position and held that the transaction would qualify business expediency . - Decided against revenue

Summary

Issues:
1. Disallowance of interest on borrowed funds diverted for advancing interest-free loans to sister concerns.

Analysis:

The judgment revolves around the appeal challenging the order passed by the Income Tax Appellate Tribunal regarding the disallowance of interest on borrowed funds diverted for interest-free loans to sister concerns. The main issue is whether such diversion of funds can be considered as "commercial expediency." The Tribunal accepted the assessee's explanation that the investment in the subsidiary company was made from its own funds, not borrowed funds. The assessee also provided evidence of transactions and loans to support its case, which was acknowledged by the Commissioner of Income Tax (Appeals). The Revenue argued for the disallowance of entire interest, but the Tribunal found the loans to sister concerns qualified as business expediency, citing the decision of the Supreme Court in S.A.Builders Ltd. v. CIT.

The standing counsel for the appellant referred to various legal precedents to support their arguments. They highlighted the Tribunal's factual findings supporting the business expediency of the transactions, which were also accepted by the CIT(A). The counsel emphasized that the Tribunal's decision aligned with the principles of business expediency and distinguished it from other judgments cited by the Revenue. The judgment also noted the pending reference to the Supreme Court regarding the S.A.Builders case but affirmed that the Tribunal's decision was valid based on the factual position.

Moreover, the standing counsel referenced the decision in Punjab Stainless Steel Inds. v. Commissioner of Income-tax VII to emphasize that the factual findings supporting business expediency are crucial in such cases. The judgment concluded that there was no substantial question of law involved in the appeal, and thus, the Tax Case Appeal was dismissed. The appeal filed by the assessee was allowed, and the substantial questions of law were answered in favor of the assessee, with no costs imposed. The connected miscellaneous petition was closed accordingly.