Commercial expediency protects interest deduction on subsidiary funding, while waiver of interest remains taxable under section 41(1).

Interest on borrowed funds was held not to be disallowable where the assessee advanced money to its subsidiary under a BIFR-sanctioned rehabilitation scheme, because the advance was made under a business-linked obligation and satisfied the test of commercial expediency; the disallowance was deleted. Waiver of interest by banks and on debentures was treated as taxable under section 41(1), as the assessee did not dispute the provision's applicability and the pendency of BIFR-related proceedings did not negate taxability; the addition was sustained, subject to consequential relief if granted in those proceedings.

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Issues: (i) Whether interest on borrowed funds could be disallowed where the assessee advanced money to its subsidiary under a BIFR-sanctioned rehabilitation scheme on grounds of commercial expediency. (ii) Whether waiver of interest by banks and on debentures was taxable under section 41(1) of the Income-tax Act, 1961.

Issue (i): Whether interest on borrowed funds could be disallowed where the assessee advanced money to its subsidiary under a BIFR-sanctioned rehabilitation scheme on grounds of commercial expediency.

Analysis: The assessee advanced funds to its subsidiary pursuant to a rehabilitation scheme sanctioned by BIFR, and the scheme required the promoters to provide contribution for rehabilitation. The advances were therefore made under a legal obligation connected with the rehabilitation of the subsidiary and were used for business purposes. On these facts, the advances were not for non-business purposes but were driven by commercial expediency, attracting the rule that interest on borrowed funds cannot be disallowed when such advances are made for business exigencies.

Conclusion: The disallowance of interest was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether waiver of interest by banks and on debentures was taxable under section 41(1) of the Income-tax Act, 1961.

Analysis: The assessee did not dispute the applicability of section 41(1). The amounts represented waiver of interest by banks and on debentures, which fell within the taxing provision. The pendency of the application before the Director of Income-tax (Revenue) in pursuance of the BIFR order did not negate the taxability, though consequential relief was left to be given in accordance with the decision on that application.

Conclusion: The addition was upheld, subject to consequential relief if granted in the pending BIFR-related proceedings.

Final Conclusion: The appeal succeeded on the issue of interest disallowance but failed on the taxability of the waiver amounts, resulting in a partly favourable outcome for the assessee.

Ratio Decidendi: Interest on borrowed funds is not disallowable where the assessee advances money to a subsidiary pursuant to a sanctioned rehabilitation scheme and the advance is made on grounds of commercial expediency.

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