2019 (12) TMI 506 - HC - Income Tax

Deduction of interest on borrowed fund when the same is utilised to give interest free loan/share application money to subsidiary companies - HELD THAT - In M/S E-CITY INVESTMENTS HOLDINGS 2019 (4) TMI 1793 - BOMBAY HIGH COURT Assessee is a private limited company and is engaged in the business of financing. During the scrutiny assessment of the assessee's return for the assessment year 2008-09, AO noticed that the assessee had claimed expenditure of interest paid on borrowed funds. The assessee had also funded its sister concern without charging interest. AO therefore disallowed the interest expenditure. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment held in favour of the assessee. The entire issue is squarely covered in favour of the assessee in case of S.A.Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT . The Tribunal correctly held that the assessee's decision to fund its subsidiaries driven by business exigency.

Summary

Issues:
Challenge to ITAT order on deduction of interest on borrowed fund utilized for interest-free loans to subsidiaries.

Analysis:
The High Court considered the appeal challenging the ITAT order regarding the deduction of interest on borrowed funds utilized for interest-free loans to subsidiaries. The Court referred to a previous case involving the same assessee where a similar issue was addressed. In that case, the Assessing Officer disallowed the interest expenditure claimed by the assessee for funding sister concerns without charging interest. However, the Tribunal ruled in favor of the assessee, citing the decision of the Supreme Court in the case of S.A. Builders Ltd. Vs. CIT. The Tribunal emphasized that if funds were utilized for commercial expediency, the decision lies with the assessee, and the Revenue cannot interfere in determining reasonable expenditure. The Tribunal concluded that the assessee's decision to fund its subsidiaries was driven by business exigency, aligning with the principles established in the S.A. Builders Ltd. case.

The High Court upheld the Tribunal's decision, stating that there was no error in the Tribunal's view. The Court reiterated that the issue was squarely covered in favor of the assessee based on the precedent set by the S.A. Builders Ltd. case. The Court agreed with the Tribunal's finding that the assessee's decision to provide funds to its subsidiaries was justified by business exigency. Consequently, the Court dismissed the Income Tax Appeal, stating that no question of law arose in this matter, and thus, the appeal was also dismissed.