2015 (11) TMI 342 - HC - Income Tax

Disallowance of interest paid to the bank - the appellant/assesse had advanced an interest free loan to its sister concern although the appellant had no business dealings with the sister concern - Whether while arising at the ‘chargeable income’ u/s 29 considering the provisions of Section 36(1)(iii), the disallowance of interest paid to banks is mandatory on the true and correct interpretation of the words ‘for the purpose of business? - Held that:- The Assessing Officer’s view that the advance was not for business purposes as the appellant had no business dealings with the sister company is erroneous. Commercial expediency in advancing loans does not arise only on account of there being transactions directly between the holding company and the subsidiary company or between the group companies inter se. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one group company to advance amounts to another group company, if, for instance, as a result thereof the former benefits.

In the present case, as we have already demonstrated, there would be a direct benefit on account of the advance made by the appellant to its sister company if the same improves the financial health of the sister company and makes it a viable enterprise. We hasten to add that it is not necessary that the advance results in a positive tangible benefit. So long as the amount is advanced with that view in mind or with any other commercially expedient view in mind that is sufficient.

Thus the question of law is answered in favour of the appellant and against the department. The order of the Tribunal is set aside. The appellant shall be entitled to the deduction under Section 36(1)(iii). - Decided in favour of assessee.