Interest free loan to subsidiary-disallowance for commercial expediency not relevant if advances given out of interest free funds – Punjab & Haryana HC

Interest free loan to subsidiary-disallowance for commercial expediency not relevant if advances given out of interest free funds – Punjab & Haryana High Court

ABCAUS Case Law Citation:
ABCAUS 1186 (2017) (03) HC

Date/Month of Pronouncement: March, 2017

The Ground of Appeal:
The present judgments involves two appeals filed under section 260A of the Income Tax Act, 1961 (‘the Act’) on identical grounds.

Substantial Question of Law:
One of the substantial questions of law as claimed by the appellant Revenue was as under:

Whether on the facts of the case, the ITAT has erred in holding that no interest payment is disallowable under section 36(1)(iii) on interest free loan given to sister concern ignoring the facts that the assessee has a mixed fund wherein both its internal generation and borrowed funds contribute and that the interest paid on working capital loan is directly proportional to the funds withdrawn out of it?

Important Case Laws Cited/relied upon:
CIT vs. Sridev Enterprises 
CIT vs. Givo Limited

Brief Facts of the Case:

The Assessing Officer (‘AO’) noticed that while the assessee company was paying interest on its loan taken, it had advanced interest free loans to its sister concerns/subsidiaries including fresh advance made during the previous year upto the end of the relevant year. These advances remained outstanding in the name of the subsidiaries throughout the year and there was no business transaction of any nature with the subsidiaries involved against the advance given to these concerns. The assessee submitted that the loans were extended out of surplus and interest free funds. The Assessing officer not satisfied with the reply held that there was no commercial expediency in advancing interest free loan to the sister concerns. Thus, the Assessing officer made disallowance under section 36(1)(iii) of the Act applying the rate of 7.5% being the same rate at which the assessee had paid interest.

On appeal CIT confirmed the order of the AO. However, the Tribunal allowed the appeal of the assessee company. However, aggrieved by the order of the ITAT, the Revenue contested it before the High Court.

Observations made by the High Court:
The High Court observed the following findings of the Tribunal:

1. That the AO had not made any disallowance in respect of expenditure incurred on borrowed funds under section 36(1)(iii) of the Act in relation to interest free loans and advances given to the said three subsidiary companies in the earlier years.

2. The cash flow statement of the assessee company revealed that the company after giving interest free loans to its subsidiary companies, the assessee was still left with surplus interest free funds. Thus the Tribunal held that there was no nexus of interest expenditure incurred during the year with the aforesaid loans/advances given to the subsidiary companies, warranting disallowance under section 36(1)(iii) of the Act.

3. That the observations of the CIT(A) that in all cases, it is required to be seen whether loan was given for the business purposes or not and not the source from which the loans is given was incorrect.

4. That the alternative plea for contesting disallowance under section 36(1)(iii) that loan was not given on account of commercial expediency will have relevance only if loans/advances have been made out of interest bearing borrowed funds.

The Hon’ble High Court observed that the Revenue could not show that the findings recorded by the Tribunal were illegal or perverse warranting interference by this Court.

Held:
The appeal was dismissed holding that no substantial question of law arises

Similar Judgment:
Disallowance u/s 36(1)(iii)-Business Expediency not a must – Allahabad High Court Click Here >>