2015 (11) TMI 1913 - AT - Income Tax

Commercial expediency supports interest deduction where sister concern advances are made for business purposes, not personal diversion.

Interest on borrowed funds remained deductible where advances to sister concerns were made pursuant to a demerger and for commercial expediency. The ... Commercial expediency - Allowability of interest on borrowed fundsCommercial expediency - Interest disallowance - Advances to sister concerns - Interest on borrowed funds advanced to sister concerns on account of demerger and related business needs was allowable and could not be disallowed as diversion for non-business purposes. - HELD THAT: - The Tribunal held that the proper test was whether the advances to sister concerns were made on grounds of commercial expediency. Where funds were advanced to sister concerns on account of demerger and for their business purposes, such advances could not be treated as diversion for non-business purposes merely because they were interest free. Following S.A. Builders Ltd. v. CIT , the Tribunal held that expenditure voluntarily incurred for commercial expediency is for the purpose of business, and the Revenue cannot substitute its own view for that of a prudent businessman. In the absence of any allegation that the recipient concerns or their directors had misused the funds for personal benefit, the interest on the borrowed funds was required to be allowed. [Paras 6, 7, 8]The disallowance of interest was deleted and the assessee's claim was allowed.Final Conclusion: The Tribunal held that the advances made by the assessee to its sister concerns were on grounds of commercial expediency and not for non-business purposes. The interest disallowance was therefore unsustainable, and the appeal was allowed. Issues: Whether interest on borrowed funds was disallowable when the assessee advanced money to sister concerns on account of demerger and other related business advances.Analysis: The advance of funds to sister concerns was found to be on account of demerger and for commercial expediency. Applying the settled principle that the test is whether the advance was made for business purposes, the mere fact that a third party or sister concern benefited did not justify disallowance. In the absence of any allegation that the recipient concerns or their directors diverted the funds for personal benefit, the borrowed funds could not be treated as diverted for non-business purposes.Conclusion: The interest expenditure was allowable and the disallowance was unsustainable.