TaxTMI 
TaxTMI 
2011 (1) TMI 326
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....est-free advances to its subsidiaries and whether the expenditure incurred by the assessee by way of interest was for business purposes so as to allow deductions under section 36(1)(iii) of the Act. Since the basis of the orders of the AO as passed in ITA 1337/10 and ITA 1339/10 was the same as order of the AO passed in ITA 1340/2010, we may briefly refer to the facts of the case of this appeal which pertained to AY 2001-02. 3. AO assessed income at Rs. 29,85,70,311 as against returned income of Rs. 73,47,390 for the AY 2001-02. The assessee company had claimed deduction of Rs. 28,98,86,967 being interest paid on the borrowings. The AO while noticing that the assessee had made interest free advances to its subsidiary companies out of funds borrowed on interest, disallowed deduction of Rs. 28,98,86,967. In the appeal the CIT(A) after going through the entire record allowed the deductions of the aforesaid amount of payment of interest on borrowings. Relevant part of the order of CIT(A) is reproduced as under : "The facts of the case clearly indicate that the disallowance has been made without establishing on record, any nexus between borrowed funds and specific advances to subs....
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....made to subsidiaries were part of opening balance brought forward from the earlier year, the disallowance made by the AO for the AY 2004-05 is also deleted. 5. The revenue preferred appeals against the orders of the CIT(A) in all the three cases before ITAT. The contention of the revenue before the ITAT and also before us were that it was not the assessee's business to invest the shares of the subsidiary companies; that while the assessee had borrowed money and had paid interest thereon, the amount borrowed had been diverted interest-free to the subsidiary companies which no prudent businessman would do so; that the assessee company wrongly debited to its profit and loss account, the amount of interest towards acquisition of capital asset and that the expenditure incurred was not for the business purposes of the assessee. 6. Learned ITAT after perusing the material on record and hearing arrived at the following : "The expenditure to the tune of Rs.28.99 crores was disallowed as having funds borrowed and interest expenditure not for the assessee's business purposes. The amounts were made out of mixed funds. At page 41 of the assessee's paper book is the balance sheet of the....
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....-interest bearing funds at the time of making advances to its subsidiaries. He submitted that the investment in subsidiaries should not be viewed in line with other interest free advances and that the same should be treated for the purpose of business for the reason that profit of subsidiary eventually forms part of the holding company. He further submitted that since all the funds were deposited in common account of the assessee company and there being sufficient interest-free funds available, there was no nexus between the advances given to the subsidiaries and borrowals. 9. In the case of CIT v. United Breweries [1973] 89 ITR 17 (Mys.), a plea was also raised stating that subsidiary company was a part and parcel of the parent company and, therefore, the principals of agency applied and interest as claimed was entitled to deduction under section 36(1)(iii). It was held that if the parent company exercised functional control over the subsidiary then the existence of such subsidiary company as a separate legal entity did not prevent the business of the subsidiary being treated as that of the parent company. 10. In the case of S.A. Builders (supra) the Hon'ble Supreme Court wa....
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....TR 1, CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 etc. In our opinion, the High Court as well as the Tribunal and other Income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. No doubt, as held in Madhav Prasad Jantia v. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad's case (supra), the borrowed amount was don....