2014 (7) TMI 388 - AT - Income Tax

Interest free advances to M/s. Nitya Laboratories Ltd. Held that - M/s. Nitya Laboratories Ltd. has entered into an exclusive arrangement with the assessee and has been carrying out job work of the assessee-company - the assessee has given interest free advanced from time to time to M/s. Nitya Laboratories Ltd. to take care of the working capital requirements since the entire manufacturing facility of M/s. Nitya Laboratories Ltd. is used by the assessee Relying upon M/s. SA Builders Ltd. vs. CIT & Anr. 2006 (12) TMI 82 - SUPREME COURT - in order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern should be allowed as a deduction u/s 36(1)(iii) of the Act. The assessee s total sales during the year is ₹ 167.34 crores which consists of goods manufactured by the assessee-company and sales of ₹ 120.47 crores and goods manufactured by M/s. Nitya Laboratories Ltd. on job work basis, which in turn sold by the assessee at ₹ 46.87 crores - the assessee is having accumulated profits in reserves and surplus and at the opening of the year it is at ₹ 23.67 crores and at the year ending it is at ₹ 43.37 crores and the aggregate amount of equity and reserves at the year ending is ₹ 51.63 crores - The sale value of the products exclusively manufactured by M/s. Nitya Laboratories Ltd. for the assessee-company constitutes 38% of the total sales of the assessee company - for the sake of commercial expediency and out of business prudence the assessee has advanced these amounts to M/s. Nitya Laboratories Ltd. - Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of interest-free advances to M/s. Nitya Laboratories Ltd.
2. Commercial expediency of advancing interest-free loans.
3. Utilization of borrowed funds for advancing to a sister concern.
4. Amalgamation of M/s. Nitya Laboratories Ltd. with the assessee company.

Detailed Analysis:

Disallowance of Interest-Free Advances:
The appeal by the assessee challenges the CIT(A)'s order confirming the disallowance of Rs. 1,29,71,323 on account of interest-free advances to M/s. Nitya Laboratories Ltd. The assessee argued that these advances were necessary for the working capital requirements of Nitya Laboratories Ltd., which was exclusively carrying out job works for the assessee. The CIT(A) held that the assessee did not substantiate its claims with documentary evidence and concluded that there was no commercial expediency in advancing such large sums against job work charges payable.

Commercial Expediency:
The assessee contended that the advances to Nitya Laboratories Ltd. were a prudent commercial decision to ensure the continuation of its operations, which were crucial for the assessee's business. The assessee's total sales included a significant portion of goods manufactured by Nitya Laboratories Ltd. on a job work basis. The CIT(A) disagreed, stating that each entity is separate and interest-bearing funds should not be transferred under the guise of commercial expediency.

Utilization of Borrowed Funds:
The AO observed that the assessee borrowed heavily from banks and paid substantial interest and bill discounting charges. The AO argued that there was no commercial expediency in borrowing funds at high interest rates to advance them interest-free to another concern. The assessee countered that it had sufficient accumulated profits and reserves, and the advances were made to ensure the operational continuity of Nitya Laboratories Ltd., which was integral to its business.

Amalgamation:
The assessee also highlighted that Nitya Laboratories Ltd. got amalgamated with the assessee company with effect from 01-04-2009, as approved by the Hon'ble High Court of Andhra Pradesh. This amalgamation was presented as further evidence of the intertwined business interests and the necessity of the advances.

Judgment:
The Tribunal, referencing the Supreme Court's decision in M/s. SA Builders Ltd. vs. CIT & Anr. (288 ITR 1), emphasized that the test for allowing interest on borrowed funds advanced interest-free to a sister concern is whether the loan was given as a measure of commercial expediency. The Tribunal noted that the assessee's total sales included a substantial portion of goods manufactured by Nitya Laboratories Ltd., and the advances were necessary to keep Nitya Laboratories Ltd. operational, which was crucial for the assessee's business. The Tribunal concluded that the advances were made out of commercial expediency and business prudence.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the advances to Nitya Laboratories Ltd. were justified on grounds of commercial expediency. The disallowance of Rs. 1,29,71,323 was overturned, and the appeal was pronounced in favor of the assessee on 27th June 2014.