Interest claimed by assessee allowed by HC.

Facts in Brief:

1. Originally assessee has filed return qua the assessment year 2003-04 declaring total income of Rs.4,78,34,082/- which was processed under section 143(2) (of Income Tax Act, 1961) (hereinafter 'the Act') on 27.02.2004 but later on the return was revised on 10.03.2005 declaring an income of Rs.4,72,61,650/- to claim expenses pertaining to the relevant previous year but booked in the next financial year and to claim benefit of late deposit of EPF by relying upon the decision of the ITAT, Delhi in the case of Vestas RRB India Ltd.

2. The assessee claimed the expenses pertaining to AY 2003-04 recorded in the tax audit report for FY 2003-04 relevant to AY 2004-05. The same was claimed in the relevant previous year while revising the return. Thereafter the case was subjected to scrutiny and consequent upon the issue of notices u/s 143(2) (of Income Tax Act, 1961) and 142(1), Shri Karan Mehta, CA put in appearance, filed necessary details, books of accounts and also discussed the case.

3. Assessee company is into the business of manufacturing and trading of telephone instruments and during the relevant previous year, the assessee declared total loss of Rs.36.33 crores as compared to Rs.37.72 crores in the immediately preceding year. The AO disallowed the expenditure claimed by the assessee on account of interest paid amounting to Rs.48,08,518/- on the ground that assessee has utilized its interest bearing funds to advance loans to its subsidiary companies which has also been affirmed by the CIT (A).

4. The assessee carried the matter before the ld. CIT(A) who has partly allowed the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.

On appeal HC held as under,

5. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency.

6. It has been repeatedly held by this court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC),CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971 82 ITR 166 (SC], etc."

7. By following the ratio of the judgment in Hero Cycles Pvt. Ltd. (supra), we are of the considered view that when AO has not disputed that the loan was advanced to M/s. Bharti Infotec Ltd. as per Memorandum and Articles of Association to promote business of its subsidiary, the interest claimed by assessee thereon cannot be disallowed. Moreover, it was commercial expediency of the assessee company to advance the loan to promote business of its subsidiary company. So, we are of the considered view that the advances made to the subsidiary companies are to be treated as business advances.

8. Moreover, when the assessee company was carrying out its business activities through its subsidiaries and the assessee company was having interest free funds to the tune of Rs.99.27 crores and Rs.101.11 crores available with the assessee company in the beginning and end of the financial year respectively under consideration as per balance sheet not disputed by the AO when the assessee has claimed to have paid loan amount to its subsidiary from the mixed fund, then, it should be assumed that payment was made out of interest free funds. So, when the AO has not disputed the fact that the assessee company has used interest free funds only for advancing money to M/s. Bharti Infotec Ltd., the question of making disallowance on prorata basis does not arise.

9. By following the ratio of the judgment in the case of Hero Cycles Pvt. Ltd. (supra), we are of the considered view that when the assessee has made investment for business expediency to promote the business of its subsidiary, the interest paid thereon has to be allowed and as such, AO as well as CIT (A) have erred in making disallowance of assessee's claim of deduction on account of interest on prorata basis. Consequently, ground no.2 is determined in favour of the assessee.

10. In view of what has been discussed above, we hereby allow the present appeal filed by the assessee.

Case Reference - M/S Bharti Teletech Limited, vs Assessee.