2021 (9) TMI 1200 - AT - Income Tax

Disallowance u/s. 36(1)(iii) - interest disallowance qua advances made to the assessee's associated entities - business expediency - HELD THAT - As funds sanctioned by the bank were utilized in other group companies on the direction of the holding company. These funds were not utilized for any purpose of the object of the assessee company. Hence, the exclusive utilisation of these funds were not for the purpose of the assessee's business and the expenditure of interest is not for the purpose of assessee's business and clearly for the purpose of other group companies. Coming to the question of business expediency in this transaction, any act carried out for the purpose of its own business or carried out for the benefit of the subsidiary as a share holder can be referred to as business expediency. In the given case, the assessee is in the business of consultancy and no business commitment to fund other sister concern and the action of the assessee to fund step down subsidiary will not fit into representing any share holder commitment. The actual share holders are the holding company, any holding company diverting its own funds to the subsidiaries will fit into business expediency as held in the case of SA Builders 2006 (12) TMI 82 - SUPREME COURT The assessee company was used as a source for funding the step down subsidiaries and the cost should also be transferred to the subsidiary who has utilized the funds and the burden of cost of funds on the assessee is unwarranted, may be beneficial to the overall group but not on the assessee. It clearly indicates that the transaction of funding the sister companies are not exclusively for the purpose of assessee's business. Therefore, the ground raised by the assessee is dismissed.

Summary

Issues:
1. Interpretation of section 36(1)(iii) interest disallowance for advances made to associated entities.

Analysis:

The judgment pertains to an appeal for the assessment year 2015-16 involving the interpretation of section 36(1)(iii) of the Income Tax Act, 1961. The primary issue revolves around the disallowance of interest amounting to ?15,52,52,500 under section 36(1)(iii) by the Assessing Officer and the subsequent affirmation of this action by the CIT(A). The CIT(A) upheld the disallowance after considering the submissions of the appellant and the findings in the assessment order, distinguishing a relevant case law cited by the appellant. The tribunal noted that a similar issue had been upheld by a coordinate bench for the assessment year 2012-13, where interest on loans/advances made to associated entities was disallowed due to lack of commercial expediency. The tribunal analyzed the nature of the transactions, highlighting that the funds were diverted to step-down subsidiaries, indicating a lack of direct business connection with the appellant. The tribunal emphasized that the funds were not exclusively utilized for the appellant's business but rather for the benefit of other group companies, leading to the dismissal of the appellant's appeal against the interest disallowance under section 36(1)(iii).

The tribunal's decision underscores the importance of establishing commercial expediency and direct business connection while dealing with interest disallowances under section 36(1)(iii). The judgment provides a detailed analysis of the transactions involving advances made to associated entities and the utilization of funds by step-down subsidiaries. It emphasizes the need for funds to be utilized exclusively for the taxpayer's business to justify the deduction of interest expenses. The tribunal's decision aligns with past precedents and highlights the significance of maintaining a clear business purpose for financial transactions to avoid disallowances under the Income Tax Act. The judgment serves as a reminder for taxpayers to ensure proper documentation and justification for transactions involving related parties to support the deductibility of expenses and avoid potential tax implications.