Tribunal allows interest deduction, no diversion of funds to subsidiaries.

The Tribunal confirmed that there was no diversion of borrowed funds into subsidiary companies and allowed the deduction of interest expenditure for assessment years 2003-04 and 2004-05. The Tribunal emphasized the commercial expediency aspect and upheld the decision of the ld. CIT(A) based on the S.A Builders case. The Revenue's appeals for both assessment years were dismissed.

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Issues Involved: Disallowance of interest expenditure u/s 36(1)(iii) for assessment years 2003-04 and 2004-05 based on diversion of borrowed funds into subsidiary companies.

Assessment Year 2004-05:
The assessee company filed its return declaring total income and debited its Profit & Loss Account with interest and finance charges. The Assessing Officer disallowed the interest claimed, alleging diversion of funds into subsidiary companies without charging interest. The assessee contended that the borrowed funds were utilized for business purposes and the interest paid was deductible u/s 36(1)(iii). The ld. CIT(A) allowed the deduction, citing commercial expediency and the S.A Builders case. The Revenue challenged this, arguing that the investment in subsidiary companies was not part of the assessee's business. The Tribunal found no diversion of funds, noted the nexus between expenditure and business purpose, and upheld the ld. CIT(A)'s decision based on the S.A Builders case.

Assessment Year 2003-04:
The ld. CIT(A) had followed the order for assessment year 2004-05. The Revenue's appeal for this year was dismissed based on the same reasoning as in the previous year. The Tribunal upheld the dismissal of the Revenue's appeal for assessment year 2003-04 as well.

Overall, the Tribunal confirmed the finding of no diversion of borrowed funds, emphasized the commercial expediency aspect, and dismissed the Revenue's appeals for both assessment years.

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