2023 (2) TMI 860 - AT - Income Tax

Addition under the head Interest Free Loans and advances given to subsidiaries u/s 36(1 )(iii) - Proof of commercial expediency in giving interest free funds to its subsidiary - HELD THAT - As observed that the assessee was issued notice u/s 142(1) to explain commercial expediency in giving interest free funds to its subsidiary but the AO failed to take cognizance of the nature of work and fund flow of the company of assessee as being in business of being agent of international and domestic airlines so it had fast movement of funds, due to recovery of commission. The finding of the AO that assessee company did not have enough funds to lend to the subsidiaries as bulk of its borrowed funds were invested in fixed assets, investments and debtors, so lending of funds to subsidiaries out of surplus fund, is not sustainable and is a finding not backed by any valid reasons. As a matter of fact, these loans to body corporate and two subsidiaries were not new but were part of previous assessments. The commercial expediency, factor has to be examined at the initial stage when money is lend and there cannot be year to year basis explanation of commercial expediency of giving interest free funds, to its subsidiaries, by assessee. The fact that the revenue appeals stand dismissed in regard to the assessment years 2010-11 to 2012-13 by this Tribunal further, bolsters the findings of this Bench that the question of commercial expediency of the interest free loans attaining finality for previous assessment years, then for the present assessment year of 2014-15, the question of commercial expediency require no further adjudication. The order of FAA and of the AO are liable to be set aside. The appeal of assessee is allowed. AO is directed to delete the addition under the head Interest Free Loans and advances given to subsidiaries u/s 36(1 )(iii). - Decided against revenue.

Summary

Issues:
Assessment of interest-free loans given to subsidiaries.

Analysis:
The appeal was filed against the order under section 250(6) of the Income Tax Act, 1961, where the Commissioner of Income Tax (Appeals) dismissed the appeal against the order passed by the Additional CIT. The assessee, a General Sales Agent for airlines, showed loans to body corporate, leading to scrutiny. The Assessing Officer raised concerns about the commercial expediency of equity investments and advances to group companies. The assessee explained that funds were lent to subsidiaries from surplus funds due to fast fund movement. However, the AO disallowed a portion of interest and guarantee charges, adding it to the assessed income.

The First Appellate Authority upheld the AO's decision, citing insufficient funds to lend to subsidiaries. The assessee challenged this, referencing previous years' rulings where similar issues were resolved in their favor. The Tribunal observed discrepancies in the AO's reasoning and the failure to consider the nature of the assessee's business, leading to a lack of valid reasons for the decision. The Tribunal noted that the matter of commercial expediency should have been addressed at the initial lending stage, not on a yearly basis. Dismissal of revenue appeals for previous years further supported the assessee's position. Consequently, the Tribunal set aside the lower authorities' orders and directed the deletion of the addition of interest-free loans given to subsidiaries.

In conclusion, the Tribunal found in favor of the assessee, emphasizing the importance of considering commercial expediency at the time of lending and not on a yearly basis. The Tribunal's decision was based on the inadequacy of reasoning by the lower authorities and the consistency of previous rulings in the assessee's favor.