TMI Blog1995 (12) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... nications Limited was in a precarious condition and as the assessee is one of the major shareholders, at the request of the borrower and on ground of commercial expediency interest was not charged on the advances made to the other party, namely, Unitel Communications Ltd. The learned Assessing Officer was of the view that the appellant-company was paying interest to the holding company on the amounts borrowed from it and as it did not choose to charge interest on the advances made by it to Unitel Communications Ltd., there was diversion of borrowed funds for non-business purposes and in this view of the matter he estimated the interest on such advances at 21% to make a disallowance of Rs. 41,95,380, from out of the interest charges claimed as deduction by the assessee-company. 2. For similar reasons the Assessing Officer disallowed interest on estimate basis at 21 per cent per annum in a sum of Rs. 40,07,010 in the case of advances made to Sapthagiri Traders (P.) Ltd. 3. The assessee appealed. The learned CIT(Appeals) held that the appellant-company had borrowed money at interest but had made advances to the two companies without charging interest. Though the balance-sheet of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also promoting companies in India, subsidise, organise, assist or aid in forming, promoting, subsidising, organising or aiding companies, syndicates, etc. One of the objects of the company is to subsidise or aid other companies. When the object itself is such a one, it is immaterial whether the company used its interest free funds or interest bearing funds for making interest-free advances. Prudent business considerations cannot be tested on short-term policies or short-term norms. Unitel Communications Ltd. is a joint sector-project with Orissa Government having 26.5 percent shares in the company. Unit Trust of India is having 12.79 per cent. U.B. Group of companies to which the assessee belongs is having 24.93 per cent. 36.23 per cent is held by the public. The company was facing financial difficulties and had to go before BIFR. The BIFR in case No. 106/92 had in its hearing held on 21-12-1994 confirmed its prima facie opinion of winding up of the company and directed Canara Bank to say whether they are agreeable for disposal of the assets of the company under section 20(4) of the Sick Industrial Companies (Special Provisions) Act, 1985. In its order dated 5-6-1994, the BIFR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only the borrowed funds that were utilised for making interest free advance s and in this connection he drew our attention to the balance-sheets of the assessee-company filed before us. He submitted that the ultimate destination of the funds belong to the holding company and in this connection he referred to pages 31 and 77 of the paper book filed by the assessee to buttress the point that the advances had been made free of interest to the UBL (United Breweries Ltd.), the 100 per cent holding-company of the assessee. Thus the UBL is the ultimate beneficiary. He sought to distinguish the cases relied on by the assessee's counsel by stating that the issue in Patnaik Co. Ltd.'s case was about purchase of Government security and the purpose of the advance in Indian Commerce Industries Co. (P.) Ltd.'s case was to increase the investment and in Durametallic (India) Ltd.'s case the transaction was between the holding-company and the subsidiary company and thus submitted that these cases are not relevant to decide the issue. Next he submitted that the interest-free advances were not made for business purposes and at any rate there was no winding up of Sapthagiri Traders Pvt. Ltd. and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the aspects of the business of the company is to help or subsidise other companies with or without security and on such conditions as it may deem fit. This is what has happened in the case of interest-free advances made to Unitel Communications Ltd. 7. In the cases reported in Pudukottai Co. (P.) Ltd., Premier Auto Finance (P.) Ltd. and N. Sundareswaran, the ratio is that where the money is borrowed at interest for purposes of business, disallowance cannot be made under section 36(1)(iii) merely for the reason that the borrowed funds had been lent to parties free of interest. The only point to be seen is whether the lending of moneys free of interest was in the course of the business and for the purpose of the business. In the case before us we have already indicated that one of the purposes of the assessee-company is to subsidise or aid other companies and such subsidising or aiding constituted one facet of its business. 8. We deal with the other question as to whether even if the appellant is authorised to subsidise or aid other companies as one of its planks of business activity, whether the interest-free advances made to the two companies was dictated by commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of security executed/to be executed by the Company in your favour and you will be at liberty to take such action against us and/or the Company as may be deemed fit by you. " Such is the undertaking given by the assessee-company to the Financial Institution in respect of loans and advances granted to Unitel Communications Ltd. Considering the objects of the assessee-company and the substantial nature of the interest it held in the loanee company and the commitment it had given to the Financial Institution for purposes of obtaining facilities for the loanee company, we hold that the assessee-company was guided by the dictates of commercial expediency in not charging interest on its loans to Unitel Communications Limited. One more aspect in this case is that ultimately Unitel Communications Limited had been declared fit for winding up by the BIFR in its preliminary finding dated 21-4-1994 and its ultimate finding dated 7-6-1994. Shri Ramamani rightly contended before us that an industrial unit does not become sick overnight or all of a sudden unlike human beings. Their Lordships of the Supreme Court in CIT v. Mahindra Mahindra Ltd. [1983] 144 ITR 225 held " that, broadly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercial expediency. 10. The authorities have not appreciated in the proper perspective the loan account of Unitel Communications as held in the books of the assessee-company in coming to the conclusion that the ultimate beneficiary in the transaction is United Breweries Ltd. We have got the account copies of United Breweries Ltd. in the books of the assessee-company at pages 31 and 32 of the paper book. From the copies of the accounts it is seen that UBL Ltd.'s account is credited by the payments made to Unitel Communications Ltd. This does not mean that the funds had been given to UBL. Therefore, the charge that UBL is the ultimate beneficiary cannot be held against the assessee. Considering the objects for which the assessee-company has been formed, the interest it had in the working of Unitel Communications Ltd. and the undertaking it had given to the Financial Institution for continuing the facility to Unitel Communications Ltd., it cannot be said that the assessee has entered into transactions of a colourable nature. Common is the tax rate in the case of holding company and subsidiary company. The materials before us do not point to any colourable device. We reject the findi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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