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2008 (4) TMI 446 - HC - Income TaxInterest on borrowed capital - Whether, Tribunal is right in law m upholding the order of the Commissioner of Income-tax (Appeals) in deleting the addition made by the Assessing Officer on account of notional interest on the money advanced by the assessee to their sister concerns, without charging any interest - In none of these cases, a finding has been recorded as to whether the interest free loan was given by the assessee to their sister concerns or their directors not as a measure of commercial expediency. Before disallowing the question of deduction of interest amount pertaining to the interest free loan advanced to the sister concerns or its directors, it is incumbent on the authorities to record such a finding. Therefore, we are of the opinion that the impugned orders, passed by the Income-tax Appellate Tribunal, are not sustainable and the same are, hereby, set aside. The matter is remitted to the Income-tax Appellate Tribunal to reconsider the matter in the light of the principle laid down by the Supreme Court in S. A. Builders Ltd. s case
Issues Involved:
1. Whether the ITAT was correct in upholding the CIT(A)'s deletion of addition made by the AO on account of notional interest on money advanced by the assessee to their sister concerns without charging any interest. 2. Whether the ITAT was correct in disallowing interest under section 36(1)(iii) of the Income-tax Act on interest-free loans granted to sister concerns. Issue-wise Detailed Analysis: Issue 1: Notional Interest on Advances to Sister Concerns - Facts: In I.T.A. No. 296 of 2007, the assessee-company advanced Rs. 17,45,000 to family members of its directors without charging interest, while paying Rs. 6,30,108 on borrowings. The AO disallowed Rs. 2,44,317 as interest, holding the advances were for non-business purposes. The CIT(A) deleted this addition, noting no nexus between the advances and CC limits availed by the company. The ITAT upheld the CIT(A)'s order. - Legal Argument by Revenue: The Revenue argued that under section 36(1)(iii) of the Act, the assessee must prove that loans were used for business purposes. The onus lies on the assessee to justify interest-free advances despite incurring interest liabilities on borrowed funds. The Revenue cited the judgment in Abhishek Industries Ltd. [2006] 286 ITR 1, asserting that interest on borrowed funds used for non-business purposes should be disallowed. - Judgment: The High Court noted that the ITAT did not examine the principle of "commercial expediency" as laid down by the Supreme Court in S. A. Builders Ltd. [2007] 288 ITR 1. The matter was remitted to the ITAT to reconsider if the interest-free loans were advanced as a measure of commercial expediency. Issue 2: Disallowance of Interest under Section 36(1)(iii) - Facts: In I.T.A. Nos. 341 and 342 of 2007, the assessee-company advanced Rs. 1 crore to a sister concern without charging interest, while incurring interest liabilities on borrowed funds. The AO disallowed Rs. 4,66,666 and Rs. 8 lakhs for the assessment years 1996-97 and 1997-98, respectively. The CIT(A) deleted these additions, stating the AO did not establish that borrowed funds were used for non-business purposes. The ITAT upheld the CIT(A)'s order. - Facts: In I.T.A. No. 553 of 2007, the assessee advanced interest-free loans to sister concerns while incurring interest liabilities on borrowed funds. The AO disallowed Rs. 2,56,358 under section 36(1)(iii). The CIT(A) deleted this addition, following the Tribunal's decision for previous years. The ITAT reversed the CIT(A)'s order, citing the judgment in Abhishek Industries Ltd. [2006] 286 ITR 1. - Legal Argument by Assessees: The assessees argued that the advances were made out of non-interest-bearing funds and not from borrowed funds. They cited the Supreme Court's decision in S. A. Builders Ltd. [2007] 288 ITR 1, emphasizing that the real test is whether the advances were made as a measure of commercial expediency. - Judgment: The High Court reiterated that the ITAT must examine if the interest-free loans were given as a measure of commercial expediency. The ITAT's orders were set aside, and the matters were remitted for reconsideration in light of the Supreme Court's judgment in S. A. Builders Ltd. [2007] 288 ITR 1. Conclusion: The High Court set aside the ITAT's orders in all four appeals and remitted the matters for reconsideration. The ITAT was instructed to re-evaluate the cases based on the principle of "commercial expediency" as laid down by the Supreme Court in S. A. Builders Ltd. [2007] 288 ITR 1. The ITAT may seek additional reports from the AO if necessary.
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