2021 (9) TMI 599 - AT - Income Tax

Addition u/s. 36(1)(iii) r.w.s. 37 - interest-free loan to subsidiary in Malaysia out of borrowed funds and has not derived any business advantage by advancing such a huge amount - As per DR no commercial expediency to advance such loan - HELD THAT - Though the assessee advanced interest bearing funds to subsidiary in Malaysia, the assessee has not been able to establish any commercial expediency to such advancing of interest free loan to this company and both the companies are in different line of business. Further, after receiving the loan from assessee company, subsidiary Company used the same funds to advance to the related parties from year to year as seen from its annual accounts reproduced in earlier para. Being so, the CIT(Appeals) rightly held that the assessee company and subsidiary are in two different business being land development construction and hospitality and the assessee has not been able to establish any business advantage derived by the assessee by advancing such loan to Amethyst Hospitality (P) Ltd. - CIT(Appeals) is justified in sustaining the addition made by the AO by invoking the provisions of section 36(1)(iii) of the Act.- Decided against assessee.

Summary

Issues:
1. Disallowance under section 36(1)(iii) of the Act
2. Commercial expediency of interest-free loans to subsidiary
3. Interpretation of "commercial expediency" in business transactions
4. Justification of disallowance by AO and CIT(A)
5. Application of Supreme Court judgment in S.A. Builders v. CIT

Issue 1: Disallowance under section 36(1)(iii) of the Act:
The appeal challenged the disallowance of ?40,46,607 under section 36(1)(iii) of the Income Tax Act, 1961. The disallowed amount was related to interest-free advances made to a subsidiary company, leading to a tax effect of ?12,50,402. The Assessing Officer disallowed the proportionate financial costs on these advances, citing lack of connection between the businesses of the assessee and the subsidiary engaged in hospitality.

Issue 2: Commercial expediency of interest-free loans to subsidiary:
The appellant argued that the loans were advanced to the subsidiary for business purposes, emphasizing commercial expediency. However, the Assessing Officer contended that the loans were not utilized for the business of the assessee, leading to the disallowance. The appellant claimed that the transactions were in the nature of shareholders' activity or stewardship activities.

Issue 3: Interpretation of "commercial expediency" in business transactions:
The CIT(A) upheld the disallowance, stating that there was no commercial expediency in advancing interest-free loans to a subsidiary in a different line of business. The CIT(A) relied on the Supreme Court's ruling in Dalmia's case, emphasizing the need for commercial expediency in such transactions.

Issue 4: Justification of disallowance by AO and CIT(A):
Both the AO and CIT(A) justified the disallowance by emphasizing the lack of business advantage derived from advancing the loans to the subsidiary. They highlighted the absence of a nexus between the businesses of the assessee and the subsidiary, leading to the conclusion that the loans were not allowable as deductions under section 36(1)(iii) of the Act.

Issue 5: Application of Supreme Court judgment in S.A. Builders v. CIT:
The appellant relied on the Supreme Court judgment in S.A. Builders v. CIT to argue for the allowability of interest expenditure based on commercial expediency. However, the Tribunal found that the appellant failed to establish commercial expediency in advancing interest-free loans to the subsidiary, especially considering the different lines of business between the companies.

In conclusion, the Tribunal dismissed the appeal, supporting the disallowance of the interest-free advances made to the subsidiary based on the lack of commercial expediency and business advantage derived from the transactions. The decision was based on the interpretation of relevant legal provisions and precedents, emphasizing the importance of commercial expediency in such financial dealings.