Tribunal rules interest expenses deductible when loans given for commercial expediency

The Tribunal allowed the appeal filed by the assessee, ruling in favor of the assessee. The disallowance of interest expenses amounting to Rs. 47,82,612 was deleted as the loan to the subsidiary was financed from interest-free funds and given out of commercial expediency. The Tribunal emphasized that loans given under commercial expediency should not attract interest disallowance, citing the Supreme Court's decision in SA Builders Ltd. vs CIT.

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Issues Involved:
1. Disallowance of Interest Expenses related to Interest-free Advance/loan to Subsidiary Company.

Summary:

1. Disallowance of Interest Expenses:
The primary issue in this appeal is the disallowance of interest expenses amounting to Rs. 47,82,612, which is attributable to an interest-free advance/loan of Rs. 3,72,18,771 given by the assessee to its subsidiary company, M/s Synergy Films Pvt. Ltd. The Assessing Officer (AO) observed that the assessee had borrowed funds on which interest was paid at an average rate of 12.85%, and thus, proportionate interest should be disallowed. The AO rejected the assessee's contention that the loan to the subsidiary was financed from interest-free funds and disallowed the interest under section 36(1)(iii) of the Income Tax Act, 1961.

2. Arguments by the Assessee:
The assessee argued that the interest-free loan to the subsidiary was an opening balance from preceding years and no fresh loans were advanced during the relevant assessment year. The interest expenses incurred were solely related to borrowings made for the business of the assessee. The loans advanced in preceding years were from interest-free funds, including share capital, reserves, and surpluses. Therefore, the disallowance of interest should not be made.

3. Arguments by the Revenue:
The Revenue argued that the issue is covered against the assessee by the Tribunal's judgment in the previous assessment year (2012-13), where similar disallowance was upheld. The facts remained unchanged except for the subsidiary now being wholly owned.

4. Tribunal's Findings:
The Tribunal noted that the wholly owned subsidiary is an extension of the parent company's business, and loans were given out of commercial expediency. The assessee had sufficient interest-free funds to cover the loan to the subsidiary. The Tribunal relied on the Supreme Court's decision in SA Builders Ltd. vs CIT, which supports the notion that loans given out of commercial expediency should not attract disallowance of interest.

5. Conclusion:
The Tribunal concluded that the addition made by the AO should be deleted, as the loan to the subsidiary was financed from interest-free funds and was given out of commercial expediency. The appeal filed by the assessee was allowed, and the disallowance of Rs. 47,82,612 was deleted.

Result:
The appeal filed by the assessee is allowed.

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