2021 (7) TMI 917 - HC - Income Tax

Interest free loans advanced by the assessee to its subsidiaries - transfer of income without transferring assets u/s. 60 or 61 - CIT (A) and ITAT have recorded concurrent findings of fact that the loans advanced by the assessee to its subsidiaries were not sham transactions or paper transactions, but further, such loans were advanced for reasons of commercial expediency - HELD THAT - There are findings of fact that the assessee is the holding company and has a deep interest in its subsidiary. Besides, there is material on record that the loans that were advanced to the subsidiaries were not from the borrowed monies. It is also not the case where the assessee had claimed any deductions on the interest paid for borrowing the monies to advance interest-free loans to its subsidiaries. Rather, the material on record suggests that the assessee had reserves of over ₹ 1,000 crores and further, even the subsidiaries, did not derive any interest income as such from out of these interest-free advances received from the assessee. All these circumstances do establish a case of commercial expediency even applying the principles laid down in S.A. Builders (supra). Therefore, based on S.A. Builders 2006 (12) TMI 82 - SUPREME COURT there is no case made out to interfere with the view taken by the CIT (Appeals) and the ITAT. The assessee, has quite rightly relied on Reliance Communication 2012 (5) TMI 160 - BOMBAY HIGH COURT which has after considering S.A. Builders 2006 (12) TMI 82 - SUPREME COURT held that the expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for business. An expenditure, which is commercially expedient, may not be incurred under a legal obligation, but so long as it meets the requirement of commercial expediency, it has to be allowed. In the present case, there is not even any allegation that the interest-free loans advanced by the assessee were utilized for the personal benefit of the directors of the sister concern - Decided in favour of assessee.

Summary

Issues:
- Whether ITAT was right in confirming the decision of deleting finance charges/interest on borrowed funds?
- Whether ITAT was right in not appreciating the addition of interest-free loans advanced by the assessee to its subsidiaries?

Analysis:

Issue 1:
The High Court declined to frame the first substantial question of law as the Appellant did not raise the challenge before the ITAT, and the authenticity of the documents was not disputed earlier. Thus, the first issue did not survive. The second substantial question of law was framed, focusing on the addition of interest-free loans advanced by the assessee to its subsidiaries.

Issue 2:
The case revolved around the assessment year 2011-12 where the assessee provided interest-free loans to its subsidiaries amounting to around ?1,32,31,09,867. The assessing officer added ?15,37,40,627 to the total income of the assessee under "Income from other sources." The CIT (Appeals) accepted the case of the assessee and deleted the added amount. The Revenue appealed to the ITAT, which upheld the deletion order. The main contention was whether the loans were advanced for commercial expediency.

The Appellant argued that without proof of commercial expediency, the interest that could have accrued on the loans should be taxed in the hands of the assessee. They cited relevant case laws to support their stance. However, the Respondent defended the impugned orders, stating that commercial expediency was established by the assessee, pointing out the absence of interest income earned by subsidiaries and the substantial reserves held by the assessee.

The High Court analyzed the findings of the CIT (Appeals) and ITAT, which confirmed that the loans were not sham transactions but were advanced for commercial expediency. They referred to a previous decision where notional interest could not be taxed without actual collection. The Court distinguished a previous case involving paper transactions from the current scenario, emphasizing the commercial expediency established in the present case.

Based on the facts and circumstances, including the absence of deductions claimed on interest paid for the loans, the Court concluded that the loans were advanced for commercial expediency. They referenced case laws to support their decision and dismissed the appeal, ruling in favor of the assessee.

In conclusion, the High Court answered the substantial question of law against the Revenue and in favor of the assessee, dismissing the appeal with no costs awarded.