By TIOL News Service

CHANDIGARH, AUG 04, 2017: THE ISSUE BEFORE THE COURT IS - Whether advances made to sister concern out of interest free funds, warrants disallowance of interest u/s 36(1)(iii), if it was commercially expedient decision. NO is the verdict.

Facts of the case:

The assessee-company is engaged in the business activity of publication of children books and as printers at its plants situated at Sahibabad in Uttar Pradesh and Jalandhar. During the course of assessment proceedings, it was noticed by the AO that the assessee had an amount of Rs.149,36,11,300/- standing as investments as ‘Share Application Money’ in various related concerns but the assessee had not received any interest or return on account of such investments. Major investment was in the shape of Share Application Money with M/s MBD Printographics Private Limited. From the perusal of balance sheet of M/s MBD Printographics Private Limited, the AO noticed that share capital of the said company had already been fully subscribed and there was no reason to accept the funds from the assessee as ‘Share Application Money’. It was concluded that the investment was colorable transaction of loan/advance without any interest to its sister concern in the shape of ‘Share Application Money’. Similar was the position with other investments. The assessee had claimed expenditure on account of Bank interest. Since the assessee had not been able to prove with evidence that interest bearing funds were used exclusively for business purposes, the expenditure of Rs.3,71,68,025/- of bank interest on CC limit, was disallowed and added to the income of assessee.

On appeal, the HC held that,

++ a perusal of the order passed by the Tribunal shows that relying upon the judgment of this Court in Bright Enterprises Private Limited Vs. Commissioner of Income Tax, it was recorded that commercial expediency in advancing loans does not arise only on account of there being transactions directly between the holding company and the subsidiary company or between the group companies inter se. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one group company to advance amounts to another group company. In the present case, the impugned advance had been made out of interest free funds available with the assessee and, therefore, there was no question of disallowing interest u/s 36(1)(iii), of the Act. After considering the entire evidence on record and the case law on the point, it was concluded by the Tribunal that disallowance of interest u/s 36(1)(iii) pertaining to the sister concerns was not justified.

(See 2017-TIOL-1477-HC-P&H-IT)