2016 (3) TMI 450 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - finance provided by way of Share Application/loan to its subsidiaries/sister concerns out of commercial expediency - Held that - It is true that no allowance no sham or colorable transaction is permissible. If the object of the borrowing is illusory or colorable and not genuinely for the business purposes, then the provision has no application. To be admissible as an allowance under the section interest must be paid in respect of the capital borrowed. Where the money borrowed have been utilized for business purposes and also earning income under the residuary head income from other sources the interest paid on money so borrowed should be bifurcated proportionately between the business income and income from other sources (H.K. Investment Pvt. ltd. vs CIT 1993 (12) TMI 19 - GUJARAT High Court . However, in the present case, the facts are entirely different as the assessee advanced the funds to its subsidiaries for business exigencies , wherein, the assessee is a holding company, thus, it is not a colorable device. The money was advanced by the assessee holding company to its subsidiaries for business expediency , which has to be judged by the business man itself. The facts brought before us are that the assessee has pleaded before the lower authorities that the amount invested has been used by the subsidiaries for the purpose of business. The assessee has significant interest in the business of subsidiaries, as these subsidiaries are in same business as that of assessee. It is further noted that major portion of the amounts were invested in the earlier years. No disallowance has been made in assessment year 2007-08 or earlier. Thus, keeping in view, the legal position as discussed it can be said that amount invested in the subsidiaries company was arising out of commercial expediency and was thus for the purpose of business of the assessee. Therefore, we reverse the decision of the ld. Commissioner of Income Tax (Appeals) and allow the appeal of the assessee. - Decided in favour of assessee

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Commercial expediency of loans advanced to subsidiaries/sister concerns.

Detailed Analysis:

Disallowance of Interest under Section 36(1)(iii):
The core issue in this appeal is the disallowance of interest amounting to Rs. 6,63,78,465 under Section 36(1)(iii) of the Income Tax Act, 1961. The assessee had borrowed funds and utilized part of these borrowed funds to provide loans and share application money to its subsidiaries and sister concerns. The Assessing Officer disallowed the interest on the grounds that the borrowed funds were not utilized for the assessee's business purposes but were granted as interest-free loans to subsidiaries. The assessee argued that these advances were made out of commercial expediency and should be allowed as a deduction.

Commercial Expediency:
The assessee contended that the loans and share application money were advanced to subsidiaries out of commercial expediency. The assessee relied on the decision in S.A. Builders Ltd. vs CIT (288 ITR 1) (SC), which established that interest on borrowed funds should be allowed if the funds were advanced to a sister concern for commercial expediency. The assessee's counsel argued that there was no finding by the Assessing Officer that the funds were not used for business purposes and emphasized that similar claims were allowed in previous assessment years without disallowance.

The Tribunal analyzed the concept of "commercial expediency" as defined by the Supreme Court in S.A. Builders Ltd. vs CIT. The court held that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits. The Tribunal noted that the assessee had a deep interest in the business of its subsidiaries, which justified the advances as a measure of commercial expediency.

Consistency in Assessment:
The Tribunal emphasized the principle of consistency, citing various judicial pronouncements that support the view that if a particular claim is allowed in one assessment year, it should not be disallowed in subsequent years unless there are significant changes in facts. The Tribunal noted that no new facts were brought on record by the Revenue for the present assessment year, and thus, on the principle of consistency, the assessee's claim should be allowed.

Judicial Precedents:
The Tribunal referred to several judicial precedents that support the assessee's claim, including:
- CIT vs Sridev Enterprises (192 ITR 165)(Kar.)
- ITO vs J.M.P. Enterprises (101 ITD 324, 336-337) (Asr)
- Escorts Ltd. vs ACIT (104 ITD 427, 512-513)(Del.)
- Malwa Cotton Spinning Mills vs ACIT (89 ITD 65, 94-95)(Chd)(TM)
- CIT vs Industrial Cables (India) Ltd. 209 CTR (P & H) 167

Conclusion:
The Tribunal concluded that the loans advanced to subsidiaries were for commercial expediency and thus allowable under Section 36(1)(iii). The Tribunal reversed the decision of the Commissioner of Income Tax (Appeals) and allowed the appeal of the assessee, emphasizing that the assessee had a significant interest in the business of its subsidiaries and that the advances were made for business purposes.

Final Order:
The appeal of the assessee was allowed, and the disallowance of interest under Section 36(1)(iii) was reversed. The decision was pronounced in the open court on 03/02/2016.

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