1993 (8) TMI 41 - HC - Wealth-tax

Interest on funds borrowed and lent to subsidiary not deductible under section 36(1)(iii): subsidiary treated as separate entity

HC held that interest on loans borrowed by the assessee and advanced to its subsidiary is not deductible under section 36(1)(iii) of the Income-tax Act, ... Deduction for interest on loans borrowed for advancing to subsidiary company u/s 36(1)(iii) - Advance Tax - Borrowed Capital - Business Expenditure - Medical Expenses - HELD THAT:- It is not disputed that the subsidiary company is a separate legal entity and the business of the subsidiary company cannot be considered as the business of the assessee itself. Thus, the interest on money borrowed by the assessee for the purpose of business of the subsidiary company could not be deductible from the income of the assessee under section 36(1)(iii) of the Act. Section 36(1)(iii) of the Income-tax Act, 1961, provides for deduction for payment of interest only if the assessee borrows capital for its own business. The business of the subsidiary company cannot be considered in law as the business of the assessee. The finding of the Tribunal based on commercial expediency appears to us to be incorrect. The fact remains that the moneys borrowed were utilised for business of the subsidiary company and not for the business of the assessee as such. In this view of the matter, we hold that the Tribunal was not justified in holding that the interest on loans borrowed for advancing to its subsidiary company was allowable under section 36(1)(iii) of the Income-tax Act, 1961. The plain language of section 36(1)(iii) of the Income-tax Act, 1961, militates against the submissions urged on behalf of the assessee. Thus, we answer question No. 1 referred to us at the instance of the Revenue in the negative and in favour of the Revenue. Issues Involved:1. Interpretation of deduction for interest on loans borrowed for advancing to subsidiary company u/s 36(1)(iii) of the Income-tax Act, 1961.2. Treatment of reimbursement of medical expenses as part of salary for disallowance u/r 40A(5) of the Income-tax Act, 1961.Interpretation of Deduction for Interest on Loans (u/s 36(1)(iii)):The High Court of Bombay addressed the issue of whether interest on loans borrowed for advancing to a subsidiary company is allowable u/s 36(1)(iii) of the Income-tax Act, 1961. The court examined a case where the assessee borrowed loans but did not utilize a substantial part for its own business, instead passing it on to its subsidiary company. The Income-tax Officer disallowed the deduction of interest paid on these loans, as the subsidiary company's business was separate from the assessee's. The Appellate Assistant Commissioner upheld this decision, but the Income-tax Appellate Tribunal ruled in favor of the assessee, allowing the deduction. The court held that the interest on loans borrowed for the subsidiary company's business cannot be considered deductible under section 36(1)(iii) as the subsidiary's business is distinct from the assessee's. The Tribunal's decision was deemed incorrect, and the court ruled against the assessee on this issue, in favor of the Revenue.Treatment of Reimbursement of Medical Expenses:The court also considered whether reimbursement of medical expenses should be treated as part of salary for disallowance u/r 40A(5) of the Income-tax Act, 1961. This issue was resolved based on previous decisions and was found in favor of the assessee, following the decision in the case of CIT v. Mercantile Bank Ltd. [1988] 169 ITR 44. The court answered this question in the affirmative and in favor of the assessee, as per the established legal precedent.Separate Judgments:The court referred to specific judgments to address each issue raised by the Revenue and the assessee. For the Revenue's questions, the court relied on the decision in CIT v. Mercantile Bank Ltd. [1988] 169 ITR 44, and the judgment in Income-tax Reference No. 356 of 1980, Ravalgaon Sugar Farm Ltd. v. CIT [1994] 208 ITR 994. The court answered these questions in favor of the assessee based on the established legal principles. Additionally, the court referenced the judgment of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 to resolve one of the assessee's questions, ruling in favor of the Revenue.