2019 (1) TMI 1475 - HC - Income Tax

Interest free loans given to sister concerns - proof of commercial expediency - Held that - The business of the assessee is that of dealers of automobiles. Its sister concerns to whom monies are advanced, are engaged in manufacture of bus bodies and running of petrol pump. In these facts, both CIT (A) and the Tribunal found that the business run by respondent s sister concerns to whom money is advanced is complementary to its business. The Apex Court in S.A. builders Limited (2006 (12) TMI 82 - SUPREME COURT ) had held that whether a particular advance made to the sister concerns is on account of business exigency is a decision which the businessman has to take and it is not for the Income Tax Authrities to put themselves in the shoes of the assessee and decide the matter of commercial expediency from the point of view of the profitability. In fact, the Apex Court also observes that no businessman can be compelled to maximize its profits. The only exception in the above order was where the money has been advanced to the sister concerns and the money is not used by the sister concerns/subsidiaries for business purpose, then alone the interest paid on borrowed amounts will be disallowed. - Decided against revenue

Summary

Issues Involved:
1. Interpretation of the Income Tax Act, 1961 regarding the disallowance of interest paid on borrowed funds.
2. Application of the decision in the case of S.A. Builders Ltd. versus C.I.T(A) and Another (2007) 288 ITR 1 (SC) to the present case.
3. Determination of commercial expediency in advancing interest-free loans to sister concerns.
4. Assessment of business exigency in relation to the profitability of the respondent-assessee firm.

Analysis:

1. The appeal under Section 260A of the Income Tax Act, 1961 challenged the order passed by the Income Tax Appellate Tribunal related to the Assessment Year 2001-02. The issue revolved around the disallowance of interest paid on borrowed funds amounting to ?52.78 lakhs, which was reduced to ?50.92 lakhs by the Commissioner of Income Tax (Appeals) (CIT(A)).

2. The main question raised was whether the Tribunal was correct in relying on the decision in the case of S.A. Builders Ltd. versus C.I.T(A) and Another (2007) 288 ITR 1 (SC) when the facts of the present case were distinguishable. The Tribunal, after examining the record, found that the amounts were indeed advanced to sister concerns by the respondent, and the activities of the sister concerns were complementary to the respondent's business.

3. The Tribunal applied the decision of the Supreme Court in the S.A. Builders Ltd. case to conclude that interest-free loans given to sister concerns by the respondent were on account of commercial expediency. It was noted that the sister concerns' business activities were complementary to the respondent's business of dealing in automobiles. The Tribunal, following the Supreme Court's decision, deleted the disallowance of interest paid on borrowed funds.

4. The respondent's counsel argued that the decision in the S.A. Builders Ltd. case should not apply to the present case as the sister companies were incurring losses, and their business was not related to the respondent's business. However, both the CIT(A) and the Tribunal found that the sister concerns' businesses were indeed complementary to the respondent's business, leading to the dismissal of the appeal.

5. The High Court upheld the Tribunal's decision, emphasizing that it is the businessman's prerogative to determine commercial expediency in advancing funds to sister concerns. The Court reiterated the principle that Income Tax Authorities should not interfere in such commercial decisions unless the borrowed funds are not used for business purposes by the sister concerns. Consequently, the appeal was dismissed, and no costs were awarded.