2012 (9) TMI 358 - AT - Income Tax

Dis-allowance of interest expenses on account of interest free advances given to subsidiary company and advances given to sister concerns at concessional interest rates - Held that - It is clear that the loan to the sister concern at concessional rate of interest as well as the investment in the subsidiary had not taken place during the previous year. As rightly contended by assessee, the revenue has accepted the fact that same were either out of own funds or were owing to commercial expediency. Even otherwise, we find that the investment in the subsidiary was only in the nature of an advance for the purchase of shares. Shares however had not been actually allotted. In such circumstances, it cannot be said that the interest free loans are investments in the subsidiary for the purpose of earning income which will not form part of total income under the Act so as to justify invoking section 14A. Since, there was commercial expediency in giving the advance by the assessee to its subsidiary, dis-allowance cannot be even sustained u/s 36(1)(iii). As far as loans to the sister concern at concessional rate of interest is concerned, we are of the view that it would be just and appropriate to direct the Assessing Officer to examine the availability of overall funds Decided in favor of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of interest on loans to sister concern.
2. Disallowance of interest paid on borrowed funds utilized for making interest-free advance to subsidiary company.

Issue 1: Disallowance of Interest on Loans to Sister Concern
The appellant, a company engaged in manufacturing, advanced loans to a sister company at a lower interest rate compared to the interest paid on borrowings. The Assessing Officer (AO) disallowed the difference in interest amounting to Rs.6,65,673, citing lack of direct business relation between the parties. The AO calculated the disallowance based on the weighted average interest rate paid by the appellant. The appellant argued that the loans were given due to commercial expediency for future business prospects in biotechnology. The AO, however, added the disallowed interest amount to the total income of the appellant. The CIT(A) accepted the appellant's plea of commercial expediency, leading to the revenue's appeal before the Tribunal.

Issue 2: Disallowance of Interest Paid on Borrowed Funds for Interest-Free Advance
The AO also disallowed Rs.34,02,550 under section 14A of the Income Tax Act, claiming that borrowed funds were used to invest in a subsidiary company for earning tax-free income. The AO alleged that interest expenses were incurred to earn tax-free dividend income. The CIT(A) accepted the appellant's argument of commercial expediency for giving advances to the subsidiary without utilizing borrowed funds for investments. The revenue contended that the borrowed funds were used for investments, justifying the disallowance under section 14A. The appellant cited the Hon'ble Bombay High Court's decision emphasizing the overall availability of funds to support their position.

In the final judgment, the Tribunal partly allowed the revenue's appeal for statistical purposes. It was observed that the disallowance under section 14A could not be sustained as there was no purchase of shares, rendering the provisions of section 14A inapplicable. The Tribunal also directed the AO to examine the overall funds availability in light of the Hon'ble Bombay High Court's decision. The Tribunal highlighted the importance of properly assessing commercial expediency in such transactions and emphasized the need for detailed examination by revenue authorities in such cases.