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2014 (10) TMI 110 - KARNATAKA HIGH COURTInterest on borrowed funds disallowance - interest free loan given to sister concerns - Whether the Tribunal was correct in holding that due to an award passed in Arbitration Proceedings between M/s.K. Raheja Development Corporation and M/s.Unique Estates Development Corporation and M/s.Sea-Crust Properties Pvt. Ltd. where the Assessee was not a party, interest was paid due to compelling reasons and therefore allowable deduction – Held that:- The explanation offered by the assessee is that the interest could not be charged due to certain disputes among certain members of Raheja Group Concern - The explanation was not accepted by the assessing authority as well as the Appellate Commissioner - it is not their opinion that in every case interest on borrowed loan has to be allowed if a assessee advances it to a sister concern - the assessee received payment from its clients and it deposited the same in the account and subsequently, the said amount were paid to the sister concern - No interest was charged for the amounts so advanced to the sister concern - the assessee borrowed the fund from the bank and lent it to the sister concern as interest free loan. The test in such a case is really whether this was done as a measure of commercial expediency - If the interest free loan was given to the sister company as a commercial expediency, then such interest paid on such capital could have to be allowed - interest on borrowed loan advanced to its sister concern cannot be claimed as deduction automatically - the sister concern has returned a substantial portion of the amount borrowed - Merely because they got into litigation and suffered arbitration award is not a justification for not paying the interest for the amount borrowed - The sister concern getting into litigation or involving itself in a arbitration proceedings to which the holding company is nowhere responsible, cannot be made a ground for allowing deduction – Decided in favour of revenue.
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