Delhi High Court Upholds Disallowance of Interest on Borrowed Capital

The High Court of Delhi ruled in favor of a company regarding the disallowance of interest paid on borrowed capital advanced to its subsidiary. The court upheld the decision of the Commissioner of Income-tax (Appeals) and the Tribunal, stating that the funds advanced to the subsidiary came from sale proceeds, not borrowed funds. As this was a factual finding and did not raise any legal question, the court declined to answer the referred question, leading to the reference application being returned unanswered.

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Issues involved: Interpretation of Income-tax Act, 1961 regarding disallowance of interest paid on borrowed capital advanced to subsidiary company.

Judgment Summary:

The High Court of Delhi was presented with a question regarding the disallowance of interest paid by a company on its borrowed capital, which was advanced to its subsidiary company. The company, engaged in the business of manufacturing and selling cement, had provided an interest-free loan to its subsidiary. The Income-tax Officer contended that this action amounted to diversion of income from the company's own hands, as it was paying interest on its borrowings. Despite the company's assertion that the funds were advanced from sale proceeds and not borrowed funds, the Income-tax Officer imposed a tax on the interest paid on loans. The Commissioner of Income-tax (Appeals) later ruled in favor of the company, stating that no disallowance could be made from the interest paid on its borrowings. The Revenue appealed this decision, leading to the Tribunal upholding the Commissioner's views based on factual findings that the advance to the subsidiary came from sale proceeds, not borrowed funds.

During the court proceedings, the Revenue's counsel argued that since the company paid interest to depositors and banks, there was no justification for providing interest-free funds to the subsidiary. The court noted that both the Commissioner of Income-tax (Appeals) and the Tribunal had determined that the advance to the subsidiary was from sale proceeds, not borrowed funds. As this conclusion was factual and did not raise any legal question, the court declined to answer the referred question. Consequently, the reference application was returned unanswered.

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