2016 (3) TMI 450 - ITAT MUMBAI

Disallowance of interest u/s 36(1)(iii) - finance provided by way of Share Application/loan to its subsidiaries/sister concerns out of commercial expediency - Held that:- It is true that no allowance no sham or colorable transaction is permissible. If the object of the borrowing is illusory or colorable and not genuinely for the business purposes, then the provision has no application. To be admissible as an allowance under the section interest must be paid in respect of the capital borrowed. Where the money borrowed have been utilized for “business purposes” and also earning income under the residuary head “income from other sources” the interest paid on money so borrowed should be bifurcated proportionately between the “business income” and “income from other sources” (H.K. Investment Pvt. ltd. vs CIT [1993 (12) TMI 19 - GUJARAT High Court ]. However, in the present case, the facts are entirely different as the assessee advanced the funds to its subsidiaries for “business exigencies”, wherein, the assessee is a holding company, thus, it is not a colorable device.

The money was advanced by the assessee holding company to its subsidiaries for “business expediency”, which has to be judged by the business man itself. The facts brought before us are that the assessee has pleaded before the lower authorities that the amount invested has been used by the subsidiaries for the purpose of business. The assessee has significant interest in the business of subsidiaries, as these subsidiaries are in same business as that of assessee. It is further noted that major portion of the amounts were invested in the earlier years. No disallowance has been made in assessment year 2007-08 or earlier. Thus, keeping in view, the legal position as discussed it can be said that amount invested in the subsidiaries company was arising out of commercial expediency and was thus for the purpose of business of the assessee. Therefore, we reverse the decision of the ld. Commissioner of Income Tax (Appeals) and allow the appeal of the assessee. - Decided in favour of assessee