ITAT, CHANDIGARH BENCH (A) Allowability of interest on borrowed funds advanced by assessee-company to its subsidiary without interest

Allowability of interest on borrowed funds advanced by assessee-company to its subsidiary without interest



Where funds have been advanced by the assessee to its subsidiary company on the ground of commercial expediency, the assessee would be entitled to claim deduction of interest on borrowed loans.



ITAT, CHANDIGARH BENCH (A)

Industrial Cables (India) Ltd.

v.

Addl. CIT

ITA No. 237/Chandi/2008

November 28, 2008

RELEVANT EXTRACTS:

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8. We have considered the, rival submissions, perused the material on record. In the instant case, rehabilitation scheme was sanctioned by the BIFR on 05.07.2001, A copy of the summary record of the proceedings of the hearing held on 5.7.2001 before BIFR- have been placed in the Paper Book. It h«as been held in the aforesaid proceedings para 22 as under:

"22. After hearing the submissions and no carefully considering the observations made 'by alt in today's hearing and the material on record,, the Bench sanctioned the scheme u/s 18(4) of the Act and the Sanctioned Scheme will come into force with immediate effect.'

9. It is thus evident from the above that, BIFR sanctioned the scheme under section 18(4) of the Act and the Sanctioned Scheme came into force with immediate effect. A copy of the sanctioned scheme has also been placed in the Paper Book at pages 25 to '56. Form. The perusal of the scheme, it is seen that the appellant company was to provide promoters contribution of 'a sum of Rs. 3,50,00,000/- to its subsidiary' Company, namely, M/s Haryana telecom Ltd. In fact, the scheme;' also provides in para 6.2 as under:

"d) The company shall satisfy MA that the physical progress and all aspects of cost of the scheme/means 0f finance of the scheme is complied with as per schedule. To this end, the company shall furnish to MA such information and data as may be required by it at quarterly intervals. Any financial shortfall arising out of the delayed implementation of the schedule or for any other reason shall be met by the company/promoters without, any recourse to FI/Banks or seeking any further reliefs/concessions including margin money from them .than what ha already been provided for in the Scheme within a period not exceeding three months."

10. It is therefore, clear that, the assessee was obliged to provide funds to the subsidiary company under a rehabilitation scheme sanctioned by BIFR. In other words, these funds were provided by the assessee to its subsidiary company, namely M/s Haryana Telecom Ltd., as per the scheme for rehabilitation sanctioned by the BIFR. Obviously, the appellant can be said to have a deep interest in the rehabilitation of the business of the subsidiary company. Ostensibly, the funds have been put to use by the subsidiary for its business. It is thus a case where funds have been advanced by the assessee to its subsidiary company on grounds of commercial expediency. In somewhat similar situation, Apex Court in S. A. Builders (supra) observed as under:

"We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to 'be allowed if the assessee advances it to a sister concern: It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and 'hence .if the, holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."

11 From the aforesaid, it is safe to deduce that, all that is required to be seen is whether the money has been advanced by the assessee on grounds . of commercial expediency or-not? If it is so, then no disallowance of interest is tenable and the assessee would be entitled claim deduction of interest on borrowed loans. In the instant case, as is evident from the facts stated above, it is a case where funds have been advanced by the assessee to its subsidiary company on the ground of commercial expediency. It may be relevant to state here that, this fact was duty stated before Assessing Officer, as would be evident from the reply filed before Assessing Officer dated 9-10-2007 as under:-

"A sum of Rs. 3,47,00,000/- was advanced to Haryana Telecom Ltd. Rohtak on various dates as per. details attached. Haryana Telecom Ltd.-is a ... subsidiary 6f Industrial Cables[(I} Ltd.. IT was declared sick as per Sick 'Industrial'. Companies Special Provisions Act, 1985 vide Board for Financial & Industrial Reconstruction (BIFR} order dated 28-06-1999. The amount under reference was paid by Industrial Cables (India) Ltd. in pursuance of order of BIFR vide their order dated 27-08-2001 as promoter's contribution for rehabilitation scheme of Haryana Telecom Ltd. reference may be made to para 3.0 of the order dated 27-08-2001. In view of the fact stated above, no interest-free advance has been made to a subsidiary company, but the amount has been paid under legal obligation in view of the order of BIFR. Moreover, as aforesaid. Haryana Telecom Ltd. is a subsidiary of you 're. assessee company and the amount has been paid in addition to the order of BIFR for commercial expediency and, as such, is fully covered by the judgement of the apex court in the case of SA Builders vs. CIT, 288 1TR 1. Copies of orders of BIFR referred to above are enclosed."

12. Infact, this submission was also reiterated before Commissioner (Appeals). However, both the authorities below overlooked the above factual position and, held the disallowance of the interest to be tenable. We are of the respectful opinion that, judgment of jurisdictional High Court in the case of the appellant for assessment years 1991-92, 1992-93, 1993-94 and 1996-97 are no doubt binding but only when the facts of the case of the appellant in the instant year and, those years are identical. In the present case, it is undisputed that the money has been advanced by the assessee company under a sanctioned scheme of BIFR and it is a case where money had been advanced on the ground of commercial expediency. It is not a case and nor it can be held that, the money had been advanced by the assessor for non-business, purposes. In fact, there is no such finding either by Assessing Officer or CIT(A) so as to enable us to conclude that money had been diverted for non-business purposes. On the contrary, mechanical reliance on the judgment of the Hon’ble jurisdictional High Court is also not a correct way of following the judgement of the Hon’ble Punjab and Haryana High Court in the case of the appellant for assessment year 1995-96, wherein the judgment of the Hon’ble Punjab and Haryana High Court in the case of the appellant in ITA No. 88 of 2004 dated 28-3-2006 was not followed and, it was held as under:-

"We may notice that although the principle of consistency is applicable and the decision on the issue having been taken in favour of the assessee for the previous year the same has to be followed, but each assessment year being an independent one, in view of conscious judgment of this Court on the issue after referring to, other judgments and in absence of any direct judgment of the Hon'ble Supreme Court, we are of the view that the earlier order of this Court dismissing appeal of the revenue in limine cannot be taken to be conclusive."

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