2014 (4) TMI 680 - HC - Income Tax

Disallowance u/s 36(1)(iii) of the Act Interest free advances - Whether the Tribunal fell into error in setting aside the disallowance u/s 36(1)(iii) of the Act - Held that - The Tribunal was of the view that the advancing of interest-free monies to the subsidiary companies was driven by business considerations since the subsidiaries were also engaged in the same business in which the assessee was engaged Relying upon SA BUILDERS LTD. Versus COMMISSIONER OF INCOME-TAX (SC) 2006 (12) TMI 82 - SUPREME COURT - it would be in the interest of business of the assessee and certainly would be commercially expedient for the assessee to advance interest-free monies to the subsidiaries as part of the corporate business strategy to expand its business operations through its subsidiaries thus, the order of the Tribunal is upheld Decided against Revenue.

Summary

Issues:
1. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.

Analysis:
The High Court addressed the disallowance under Section 36(1)(iii) of the Income Tax Act, 1961. The Tribunal initially set aside the disallowance, but upon a fresh assessment, the Assessing Officer disallowed interest under both Section 14A and Section 36(1)(iii). The disallowance under Section 36(1)(iii) was based on the grounds that interest-free advances were given to subsidiaries and holding companies out of interest-bearing funds, not for business purposes. The Tribunal, however, found that the interest-free advances to subsidiaries were part of the business strategy to expand operations. The Tribunal's decision was supported by commercial expediency, citing relevant judgments.

The Tribunal considered the conditions required for claiming deduction under Section 36(1)(iii), namely borrowing capital for business purposes and paying interest on the borrowing. It found that advancing interest-free monies to subsidiaries was driven by business considerations and commercial expediency, as the subsidiaries were engaged in similar business activities as the assessee. The Tribunal concluded that it was in the business interest of the assessee to provide interest-free advances to subsidiaries as part of the corporate business strategy to expand operations. This factual finding was undisputed, leading to the Tribunal's decision in favor of the assessee.

In conclusion, the High Court answered the question of law negatively, favoring the assessee and dismissing the appeal against the revenue. The decision upheld the Tribunal's findings regarding the disallowance under Section 36(1)(iii) and emphasized the commercial expediency and business strategy behind the interest-free advances to subsidiaries.