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Issues Involved:
1. Disallowance of interest on account of interest-free loan advanced to a subsidiary company. 2. Additions on account of waiver of interest by banks and interest on debentures u/s 41(1) of the Act. Summary: Issue 1: Disallowance of Interest on Interest-Free Loan to Subsidiary The assessee appealed against the disallowance of Rs. 32,98,500 as interest on interest-free loans advanced to its subsidiary, M/s Haryana Telecom Ltd., based on the AO's conclusion that the appellant diverted interest-bearing loans for non-business purposes. The AO relied on the judgment of the Punjab & Haryana High Court for previous assessment years and disallowed the interest claimed in the P&L account. The CIT(A) upheld the AO's decision, stating that there was no specific provision in the IT Act exempting such advances and that the BIFR did not direct the loans to be interest-free. The appellant argued that the loans were advanced under a rehabilitation scheme sanctioned by BIFR, citing the Supreme Court's judgment in S.A. Builders Ltd. vs. CIT(A) & Anr., which allows interest deduction if funds are advanced for commercial expediency. The Tribunal found that the funds were advanced under a BIFR-sanctioned rehabilitation scheme, indicating commercial expediency. It referenced the Supreme Court's observation in S.A. Builders that interest on borrowed loans should be allowed if advanced to a subsidiary for business purposes. The Tribunal concluded that the disallowance was unjustified and directed the deletion of the disallowed interest amount. Issue 2: Additions on Account of Waiver of Interest by Banks and Interest on Debentures u/s 41(1) The CIT(A) noted that the appellant was declared a sick company under the Sick Industrial Companies (Special Provisions) Act, 1985, and that the BIFR had directed the CBDT/Director of IT (Revenue) to consider exempting the appellant from the provisions of s. 41(1). The appellant's application for exemption was still pending. The CIT(A) held that the waiver of interest by banks and on debentures amounting to Rs. 1,87,78,000 and Rs. 92,14,000 respectively was taxable u/s 41(1) until the application was disposed of. The Tribunal agreed with the CIT(A) that the provisions of s. 41(1) were applicable and that the waived interest amounts were taxable. However, it directed that necessary relief be granted to the appellant in terms of the order passed by the Director of IT (Revenue) once the application was disposed of. Conclusion: The appeal was partly allowed, with the disallowance of interest on the interest-free loan to the subsidiary being deleted, and the additions on account of waiver of interest by banks and on debentures being upheld subject to the pending application before the Director of IT (Revenue).
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